Archive

Posts Tagged ‘merger’

Mining Week 42/’12: Bakrie vs. Bumi

October 13, 2012 Comments off

Top Stories of the Week:

  • Bakrie proposed to buy Bumi’s assets
    • The Bakrie Group, which owns approx. 24% of Bumi Plc, has an offer to buy Bumi plc’s assets (Berau and Bumi Resources) and leave the London listed miner active in Indonesia behind as a cash shell. The group previously held 48%, but sold 24% to Borneo Lumbung to ease debt issues.
    • Bumi’s share price has dropped 80% versus the high in July 2011 on the back of low coal prices and governance issues.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal

    Bumi plc structure: London listed miner owns a stake in Berau coal and Bumi resources.

  • BHP Billiton seeks to cut costs

Trends & Implications:

  • Bakrie’s move to leave Bumi plc could imply the end of the Indonesian coal ambitions of Rothschild’s venture. If Bakrie finds the money to execute the deal, it offers other shareholders an opportunity to limit their losses. Bumi could try to reinvent itself and buy assets in other regions with the cash received for Bumi resources and Berau, but it would start with significantly less cash to acquire companies than in its attempt in 2011.
  • The updated M&A share attractiveness tracker shows a relative leveling of the playing field in terms of mega M&A over the past month. South African listed companies clearly took a major hit, but as the outlook for these companies deteriorated at the same time the shares have not gained much attractiveness from an acquisition standpoint. Fortescue managed to fend of urgent debt issues and saw its share price rise, but it remains one of the more attractive acquisition targets. BHP Billiton lost its position as the best positioned acquirer as outlook for the company deteriorates with the expectation of slowing global demand.(

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme

October 8, 2012 Comments off

Top Stories of the Week:

  • South African strikes spread; workers fired
    • Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
    • South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
    • AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
    • Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
  • Xstrata board recommends Glenstrata deal and complicates voting
    • Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
    • Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
    • Sources: BusinessWeek; Financial Times

Trends & Implications:

  • The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
  • The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 39/’12: Fortescue moves on; GlenStrata almost there

September 22, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s board votes October 1st on Glencore offer
    • The decision by Xstrata’s board on whether or not to endorse Glencore’s new bid for the company is delayed by a week to October 1st. The endorsement might help to convince a majority of shareholders to accept the offer for 3.05 shares of Glencore per share of Xstrata.
    • The debate around generous retention packages for Xstrata’s key managers started again as several large shareholders voiced their discontent. Glencore stressed nothing will change to those packages unless Xstrata’s board wants to adjust them. Finding a compromise to satisfy the key shareholders might be the final step for the board to make the deal happen.
    • Sources: Wall Street Journal; Financial Times 1; Financial Times 2
  • Fortescue solves debt problems by refinancing $4.5b debt
    • Fortescue announced refinancing of $4.5bn debt with Credit Suisse and JP Morgan as underwriters. Debt maturity of the new deal is 5 years. The company was facing liquidity problems as low iron ore prices and aggressive investment schedules were undermining its ability to repay debt.
    • Sources: Wall Street Journal; Fortescue announcement

    Fortescue’s debt profile prior to refinancing

  • Oyu Tolgoi waiting for power
    • Rio Tinto’s Oyu Tolgoi mine is 97% complete, but negotiations with Mongolian and Chinese governments on power supply delay startup. Oyu Tolgoi built 220Kvolt power line to connect to the Chinese grid, but can’t sign a offtake agreement without consent of the Mongolian government
    • Sources: Financial Times; The Australian; Project website

Trends & Implications:

  • Oyu Tolgoi’s trouble to get powered is just one example of the challenges many large operations face to secure affordable power supply. The power requirements of a large operation require a significant change and development of power grids of many developing nations. Generation capacity is typically not readily available and the large offtake trigger discussions about long term price agreements.
  • After meeting with Glencore’s board this week, Xstrata’s board appears to be working hard to make the merger/acquisition go ahead. It is hard to imagine another outcome in which Xstrata’s shareholders get more value for their company, making it likely they will accept the offer. If the deal is approved by Xstrata’s shareholders, the changes in holdings various large investors will likely make will give an interesting insight into the clientele effect the integration of a mining house and a commodity trader could have.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 37/’12: Glencore increases bid to take over Xstrata

September 8, 2012 Comments off

Top Story of the Week: Glencore takes Xstrata bid hostile

  • Hours before Xstrata’s shareholders were to vote on the proposed merger of equals, Glencore announced it would make a higher bid on different terms . If the vote would have gone on the Qatari sovereign wealth fund would most likely have blocked a deal.
  • The new bid offers 3.05 shares of Glencore for each share of Xstrata, 9% up from the previous bid at 2.80x. In response to the bid Xstrata’s share price went up 8.6% on Friday, with Glencore’s share price dropping 2.9%.
  • Key changes to the previous bid are:
    1. The ‘merger of equals’ will likely change to a plain takeover. As a Xstrata’s shareholders can simply tender their shares and Glencore gains control as soon as it gains a majority of shares (up from the current 35%). Under the former proposed deal approx. two-thirds of Xstrata’s shareholders excluding Glencore would have to vote in favor of a deal.
    2. The initially proposed governance structure with Xstrata’s CEO Mick Davis as the new CEO of the combined company is scrapped and Glencore’s CEO Ivan Glasenberg will take the helm of the new company.

    Official reaction by Xstrata’s independent directors

  • The exact details of the new structure are not yet known, as Glencore is yet to submit the new bid. The implications for the position and potential retention packages for Xstrata’s current top managers and the name of the new company will become clear when the new bid is published.
  • Sources: Financial Times 1 2 3; Wall Street Journal 1 2 3; Reuters; BusinessWeek

Trends & Implications:

  • Facing the likely rejection of the merger bid Glencore had little to lose in changing the terms for the offer. The likelihood of a takeover offer being accepted is much higher than the stakes the merger was going to happen on the proposed terms. Xstrata’s shareholders know that their changes of getting an even better deal than what is offered now are very slim and that they face an immediate drop in Xstrata’s share price if Glencore doesn’t gain control.
  • The offer values Xstrata roughly $4bn higher, but as the company holds 35% of Xstrata already it would cost Glencore approx. $2-3bn extra. If the deal was canceled Xstrata’s share price was likely to lose the roughly 10% in value resulting from Glencore’s bid, amounting to a loss of $1-2bn for Glencore.
  • The sudden governance change to try to make Ivan Glasenberg CEO of the new company is hard to understand. The merger setup was criticized earlier because of the strong focus on keeping Xstrata’s executives on board with generous retention bonuses. Either Glencore’s leadership never really believed they will not be able to achieve the same results as Xstrata’s leadership or they will keep most of the retention controls in place in the new offer.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 36/’12: Anglo and Codelco compromise; Glenstrata in doubt

August 31, 2012 Comments off

Top Stories of the Week:

  • Anglo American and Codelco reach a deal on the Sur Complex
    • Anglo agreed to sell a minority stake of its Chilean Sur Projects to Codelco at a significant discount, but the company receives over $2bn more than Codelco would have to pay according to its disputed buy-in option.
    • Codelco partners with Mitsui in a JV that receives a 24.5% stake of the project.
    • Codelco’s union representative voted against the new deal, announcing action to improve the terms for the Chilean company.
    • Sources: Financial Times 1; Wall Street Journal; Financial Times 2; Financial Times 3
  • Norwegian fund joins Qatar in opposition of Glenstrata merger
    • Analysts speculate about a potential compromise on the price paid for Xstrata by Glencore: Glencore offers 2.8 shares per share of Xstrata, but Qatar’s sovereign wealth fund earlier indicated it would require a 3.25 ratio. In a new statement in which the fund says it will vote against the proposed deal the 3.25x ratio was not reiterated.
    • Norges Bank Investment Management has also build up a significant stake in Xstrata. The Qatari fund could be able to block the merger alone (depending on its current ownership level) or with the help of a few other investors.
    • Sources: Financial Times 1; Wall Street Journal; Financial Times 2
  • Australian politicians struggle with mining ‘boom’ approach
    • Iron benchmark ore prices continue to decrease, loosing more than 50% vs. the peak around $200/wmt early in 2011 and 36% year to date. The profits of the iron ore dependent miners has followed this trend.
    • Royalties and income taxes on mining firms are an important pillar of the Australian budget, built for a large part around the newly introduced Mineral Resource Rent Tax. Several Australian politicians have expressed their concern with the perspective of a significant reduction of tax income. The MRRT alone was planned to bring in over $6bn of government income, but because of the progressive nature of the tax the income will be very small at current price levels.
    • Sources: Wall Street Journal; Financial Times; text

Trends & Implications:

  • Xstrata’s shareholder vote on the proposed merger with Glencore is anything but a done deal. Several large shareholders want Glencore to sweeten the offer of 2.8 shares of Glencore per share of Xstrata. However, the actual share ratio has been hovering around 2.65-2.70 since mid May, indicating that a significant share of the market expects the ratio to drop if the deal does not go on. Xstrata has higher value for Glencore than for current shareholders, but it is unlikely the company will want to pay more than the proposed 2.8x ratio and give all of that additional value to Xstrata’s current shareholders.

2012 | Wilfred Visser | thebusinessofmining.com

Mining M&A – Top 40 Share attractiveness ranking

August 4, 2012 Comments off

Valuations across the mining industry are coming down as a result of low commodity prices and uncertainty about the future of the global economy. Many companies are reviewing investment plans, pressured by investors to return money to shareholders if the project pipeline is short of feasible investment opportunities. Most companies in the industry will be extremely careful with large-scale M&A at this moment, but for some companies with either a lot of cash or a good position to give out more equity the reduced prices could provide opportunities to make a big acquisition. The ranking presented below presents the attractiveness of acquiring any of the Top 40 mining companies.

An acquisition of any of the world’s largest 40 miners will have to be financed to a large extent by raising additional capital from equity holders, as the acquisition price would be too high for most companies to pay cash after taking on more debt. The attractiveness of executing a share deal to acquire a company is split into the current level of share depression (historic performance) and the outlook for the share as given in analyst targets (future performance).

The share depression is represented in the chart and the ranking below by taking the ratio of current share price compared to 52-week high, normalized to the performance of BHP Billiton, the largest company in the group (i.e. share depression of BHP Billiton = 1.0). The 52-week high is used surprisingly often in acquisitions as the price paid, as it is easy to accept for many shareholders of the target company that they will receive the highest price over the past year.

The outlook for shares is given by the ratio of consensus analyst target dividend by current share price. Whatever the historic performance of a share, the outlook ratio shows the expected potential for the share. For these large mining companies the consensus target is typically formed out of at least 10 equity analyst and banker targets. An overall ranking score of share attractiveness is calculated by dividing the outlook ratio by the share depression ratio.

In this initial ranking of attractive targets, using closing share price of August 3rd 2012, the top 5 positions are claimed by ENRC, Ivanhoe, Kinross, Peabody, and Anglo American. Each of these shares has taking a significant beating over the past year. Apart from Anglo they have all dropped about twice as far from their year high share price as BHP Billiton. However, analyst targets for each of the companies are high too, each being expected to gain at least 50% of value in the relatively short term. The combination of a big drop in share price and a promising upside makes the companies attractive for potential buyers. Clearly many more factors play a role in target selection, and politics, synergy potential, and several other factors rule out quick action for most of the top targets in the ranking. However, the chart and ranking below do serve well as a quick scan to see which companies are in the ‘danger zone’ of becoming an acquisition target.


©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 28/’12: GlenStrata in doubt

July 7, 2012 1 comment

Top Story of the Week:

  • Xstrata vote on merger with Glencore delayed
    • The vote by Xstrata shareholders on the proposed merger between Xstrata and Glencore, originally scheduled for July 12th, has been delayed to a yet to be announced date.
    • Several large shareholders, including Qatar Holding, which holds approx. 11% of the shares, have threatened to try to vote against the deal if the exchange ratio of 2.8 shares of Glencore per Xstrata share is not sweetened. Xstrata’s shareholders have a very strong voice in the deal because Glencore can’t use its 35% of the voting rights. As a result a small group of only some 15% of the shareholders could block the deal.
    • Under pressure of shareholders the proposal of cash retention bonuses for Xstrata executives was adjusted to stock only payments. The planned retention measures were made part of the vote on the merger and threatened to become an obstacle to the approval of the deal
    • The Australian antitrust authorities approved the proposed deal last week, judging that the combination would not be big enough to distort market efficiency. European Union, Chinese, and South African regulators still have to give their judgement.
    • Sources: Xstrata press releases; Financial Times; Wall Street Journal

GlenStrata timeline

©2012 | Wilfred Visser | thebusinessofmining.com

%d bloggers like this: