By Transparência e Governança
On February 2, Glencore, the controlling shareholder of Xstrata with a 34% stake, addressed rumors circulating since its IPO and announced its plan to merge with Xstrata forming a new company. The first market reaction was a rally of both stocks reflecting expectations of synergies and value opportunities with such merger. The shares of Xstrata at first rallied more intensively reflecting market´s perception that the company was in a more privileged situation given:
- Glencore took the initiative, thus it was a more interested party
- The performance track record of Xstrata´s management team is robust. Thus the market believed they would need to be convinced of the benefits of the transaction, in order to recommend the deal to minorities, likely keeping certain key management positions
- Xstrata´s minority shareholders are require to approve the transaction. Regardless of Glencore´s controlling position, which is defined by the European Union as a 30% stake, Glencore is not allowed to vote. In addition, in order to approve the transaction, it is necessary to achieve the agreement of 75% of Xstrata shareholders. This guarantees that the transaction will only take place is an overwhelming majority of Xstrata´s minority shareholders approve the transaction [UK Companies Act parts 26 and 27]
- Furthermore, the transaction is subject to the analysis of the “Takeover Panel” in the UK, which proactively analyzes the fulfillment of the code´s rules
On February 7, Glencore announced its proposed exchange ratio between the two stocks. The proposed exchange ratio is 2.8 shares of Glencore for every 1 share of Xstrata, a relationship that is close to the historic maximum (range of negotiations between 1.6x and 2.89x shares of Glencore for every 1 share of Xstrata).
If this transaction were in Brazil, things would be much different. In Brazil, the simple existence of rumors regarding the interest of a controlling company (Glencore) to merge with its controlled company (Xstrata) would likely cause a permanent discount in Xstrata´s share price relative to its intrinsic value. Instead of outperform given its operational performance or the interest demonstrated by the controlling company, the shares would suffer a discount in price given that the controlling company could implement an exchange ratio and incorporate its controlled company even if minorities disagree.
Like a self fulfilling prophesy, Glencore would take advantage of Xstrata´s depressed share price versus its intrinsic value, caused by concerns over an unfair exchange ratio, and would propose the transaction that best would fit its own interests. Glencore could even fulfill all regulatory guidelines in a formal way (Parecer de Orientação 35 of CVM), because in the end of the day, it would not be required to obtain any shareholder approval from Xstrata. Alone, the controlling Glencore could impose its own will.
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