Henderson: why we changed our minds on Glencore-Xstrata

Henderson’s John Griffiths says he initially rejected the Glencore-Xstrata tie-up, but now believes improved terms on the deal could mean the merger is beneficial to both parties.

The European Commission cleared the deal yesterday, outlining conditions for Glencore to go ahead with the $33 billion takeover of Xstrata.

Griffiths, the director of multi-strategy equities at Henderson, said the deal originally undervalued Xstrata, at 2.8 times Glencore shares per Xstrata share, while the benefits to Glencore were considerable.

‘So we were therefore pleased when the offer was raised to 3.05 times just prior to the deadline, after - we are led to believe - talks between Glencore and Xstrata’s largest shareholder, the Qatar Investment Authority, led to a deal mediated by former Prime Minister Tony Blair,’ said Griffiths.

‘Although not the top price we had hoped for, given the value we had placed on Xstrata, we did eventually support the deal, when weighing up the pros and cons and are pleased the deal seems likely to complete soon,’ he added.

On these improved terms, Griffiths said the deal is beneficial to both Glencore and Xstrata, and would financially boost the former, as the commodities trader would receive a steady source of near-term cash-flow while gaining from Xstrata’s stronger balance sheet.

‘A merger would provide a better balance between real productive assets, of which Xstrata has plenty of top class, low cost mines in diversified minerals, to Glencore’s predominance in marketing,’ said Griffiths.

‘Glencore also brought some advantages to Xstrata, especially its logistical skills in transporting product from mine to customer, and the great potential for gaining more customers for Xstrata’s product given their global marketing network,’ said Griffiths.

He added Glencore has potential new assets coming on stream in due course, which could add to longer term growth potential.

‘So the overall package as a holder of the soon to be combined company looks attractive, giving us exposure to a dynamic, multi asset, geographically balanced and vertically integrated  company with critical mass.’