Glencore International PLC (LON: GLEN), the world's largest publicly traded commodity trader, has said it is prepared to bow out of talks to buy Xstrata PLC (LON: XTA) rather than give in to a demand for more money from a major shareholder of the giant mining company.
Zug, Switzerland-based Xstrata's second-largest shareholder, sovereign wealth fund Qatar Holdings LLC, is demanding Glencore, which is based in Baar, Switzerland, raise its stake to 3.25 Glencore's shares for each Xstrata share. That's up 16 percent from the current offer of 2.8 shares. Qatar Holdings recently increased its stake to nearly 12 percent, up from 10.4 percent it held in early July.
"It's not the end of the world" if a Sept. 7 investor's vote strikes down the $30 billion merger, said Glencore CEO Ivan Glasenberg in a phone interview with Bloomberg News.
If the merger were approved, Glencore -- which is Xstrata's primary shareholder with over a third of the stock -- would become the fourth-largest mining company, fully absorbing Xstrata's assets that include a 33 percent stake in a Colombian thermal coal mine, zinc smelters in Germany, Spain and Ireland and nickel and iron ore facilities in Mauritania, Republic of Congo and South Africa.
If the deal falls through, Glencore may still pursue the acquisition in the future, according to some economists.
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"If the deal is voted down now, Glencore management believes the company will be better positioned 1-2 years from now to attempt this merger," said Jeffries in a research note.
UBS estimated the chances of a merger being voted down in September at about 60 percent, according to the Wall Street Journal.
Xstrata's share price was climbing in London trading Tuesday, up 1.17 percent to 918.40 pence ($14.46). Glencore's share price was down slightly, by 0.14 percent to 353.25 pence ($5.56). As of Tuesday the ratio of Xstrata shares to Glencore's was below the current asking bid.
Glencore reported Tuesday that net income followed commodity prices down by 26 percent for its first two quarters, to $1.8 billion from $2.4 billion. Despite the decline, the company beat Wall Street expectations.
Xstrata had earlier this month reported a 33 percent decline in first-half profit, to $1.94 billion. London-based Rio Tinto PLC (NYSE: RIO), another major player in global mining, recently reported a decline in net income of 22 percent as China growth has slowed in the past six months.