Nine months after the first circular was posted to shareholders we’re still waiting for resolution on the Glencore merger, which has been held up as much by Xstrata’s high valuation of its talent as by Glencore’s low initial valuation of the miner itself. In the meantime, strikes, low prices and mounting debt have caused problems at South African platinum miner Lonmin; Xstrata holds a 25% interest, and after being rebuffed on a takeover it has pressed for management changes.
In both cases the Swiss company has been forced to climb down, resulting in some unusual situations.
On the “merger of equals” front, the board has relented (somewhat) from its original position that a deal with Glencore wouldn’t be worth putting to shareholders without spending an extra £217 million on retention awards. However, the resulting “three-vote” structure, with the board essentially putting up (and opposing) a shareholder resolution, set a new standard for complexity in voting. With Glencore required to sit out and Qatar abstaining from the vote on retention payments, it looks as if the deal could go through against the board’s wishes. If so, and top talent departs, the board should look at the remuneration committee members who approved excessive change-of-control and severance packages rather than shareholders exercising common sense.
Looking downstream, Xstrata’s had tried to capitalise on Lonmin’s need to recapitalise, with mounting debt trouble exacerbated by strikes, the low price of platinum, and the departure of chief executive Ian Farmer on health concerns. After its suggestion of a reverse takeover, including a fully underwritten $1 billion rights issue, was rebuffed, Xstrata continued to press for management changes, offering to support a smaller rights issue (without taking control) so long as Lonmin executives were “replaced with Xstrata personnel”, as the FT reported.
Lonmin rejected the gracious offer, and put forward its own recapitalisation proposal through an $817 million rights issue, which Xstrata has subsequently agreed to back — sort-of. In a press release, CEO Mick Davis stated that the Swiss miner was participating so as not “to contribute further uncertainty to Lonmin’s position”; however, “we cannot passively lend our financial support to a strategy that we believe is flawed. We will, therefore, be seeking change to the Board and management promptly following completion of the rights issue.”
Lonmin’s recent record, with two cash calls in three years, doesn’t do much to contradict Xstrata’s assessment of the platinum miner. However if the Glencore deal goes through, Xstrata’s managers may be stretched too thin in finding synergistic efficiencies to reform the platinum miner. Hopefully their self-belief (or Glencore’s trading division) can raise the price of platinum.