Glencore, the world's biggest diversified commodities trader, is ready to walk away from its US$30 billion (Dh110.19bn) bid for the mining giant Xstrata if rival shareholder Qatar holds out for a higher price, Ivan Glasenberg, Glencore's chief executive, said yesterday.
Qatar Holding, the Arabian Gulf state's sovereign wealth fund, has built a stake of almost 12 per cent in Xstrata since Glencore launched an all-share bid in February.
Glencore, which held 34 per cent of Xstrata at the time, offered 2.8 new shares for the rest of the miner's stock. But Qatar Holding surprised the market in June by holding out for 3.25 shares - enough to potentially block the takeover.
"We cannot understand the position of the Qataris, asking for more than the 2.8. We have seen nothing coming out of recent results that supports this, in fact, we have seen quite the opposite," said Mr Glasenberg. "It is not a must-do deal. It is a deal that we believe makes sense ... but if shareholders have another opinion ... it is their choice."
Mr Glasenberg was speaking as Glencore reported a smaller than expected drop in first-half profits, with net income falling to $1.8bn, down 26 per cent from the same period last year, but ahead of the consensus forecast of $1.6bn.
Earnings before interest and tax fell 24 per cent in the first half to $2.5bn, above an analysts' consensus of $2.4bn. However, prospects for global commodities markets in the second half remain gloomy, according to Mr Glasenberg.
"We neither anticipate nor assume any material improvement in overall market or economic conditions in the near term," he said, prompting analysts to speculate Glencore may not improve its offer.
"There are expectations the proposed merger ratio of 2.8 Glencore shares could be improved to 3. But Glasenberg may even resist calls to boost the offer at all," said Mike van Dulken, the head of research at Accendo Markets.
"This is consistent with a company not inclined to bump Xstrata merger terms," said Ash Lazenby, an analyst at Liberum Capital in London.
"We reiterate our view that risk of deal-break remains high."
A vote of Xstrata shareholders is due on September 7 and Glencore's offer will need 75 per cent support to be approved.
Other Xstrata shareholders, Standard Life and Legal & General, are also believed to be against the merger.
Abu Dhabi's Aabar Investments became the largest investor in Glencore's $11bn initial public offering in May last year.
Aabar, which is majority owned by Abu Dhabi's International Petroleum Investment Company, invested $1bn in the flotation making Aabar Glencore's largest shareholder after the company's employees.
Talks between Mr Glasenberg and Ahmad Mohamed Al Sayed, the head of Qatar Holding, have not yet yielded any result and investors are pricing in that the deal will collapse ahead of an Xstrata shareholder meeting.
Glencore shares closed up 1.77 per cent to 360.0p while Xstrata rose 2.05 per cent per cent to 926.10p.
"Mr Glasenberg could still make an 11th-hour offer to Qatar but right now we are witnessing the meltdown of the biggest deal of the last five years in the natural resources industry," one banker involved in the discussions was quoted as saying on the Financial Times' website.
Earnings for the big mining groups have been squeezed by stubbornly high costs and weaker prices for key commodities and many have been reporting their first profit falls since 2009.
Glencore, however, has benefited from a "solid performance" at its trading business on the back of strong results in copper and aluminium trading, Mr Glasenberg said. Earnings before interest and tax in the trading business fell to $1.11bn in the first half, down just 10.8 per cent from the same period last year.
On the other hand, Glencore's industrial businesses suffered because of lower production and weak commodities prices. Earnings before interest and tax in the industrial business dropped to $1.39bn, down a hefty 32 per cent from the same period last year.
Group revenues were $107bn in the first sixth months of the year, up 17 per cent from the same period of last year. Earnings per share fell to 33 cents, down 44 per cent from last year but well ahead of the consensus of 22 cents.
Qatar, which has built the second-largest stake in the miner, said last week it was firm in its demand. Under takeover rules, Glencore has until two weeks before the vote date to alter the terms of its offer - that deadline is Friday. A later move is possible but would push the date back again.
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