In a happier clappier world, executives negotiating a genuine “merger of equals” would give little thought to job titles. “Who cares who’s chief executive?” they would exclaim, “So long as we work together for the benefit of the stockholders”. Group hugs and a tribal drumming workshop would ensue.
But in the case of the proposed combination of commodities group Glencore and miner Xstrata, the mooted post-merger titles of bosses Ivan Glasenberg and Mick Davis are a way of sending a price signal. Shares in Xstrata rose sharply ahead of Glencore’s on Thursday. Independent investors in Xstrata, who typically have much smaller stakes in Glencore, expect the Swiss-based group to pay a control premium in equity. But talk that Mr Glasenberg will cede the job of chief executive to Mr Davis and become his deputy damped that hope and raised Glencore’s share price.
Both men are ambitious, tough and like getting their own way. Mr Glasenberg would hold a substantial personal stake in the combined business. The idea of him as Robin rather than Batman is surprising.
But his enthusiasm for a combination cannot be understated. Glencore floated last May at the top of the market for resources stocks, mainly to make its shares a transparently priced takeover currency acceptable to Xstrata. The miner was originally demanding at least one year’s trading record from Glencore as a quoted company and a control premium for shareholders. It has dropped those requirements.
Necessity can make strange bedfellows. Glencore, capitalised at £32bn, is a vertically integrated mine owner, commodities trader and logistics company that wants to increase its exclusive access to ores, coal and oil. That would give it better price visibility throughout the supply chain and raise margins. Xstrata, worth £36.5bn, is a miner that needs greater scale to compete with behemoths such as BHP Billiton, but cannot make big takeovers because Glencore has a 34 per cent blocking stake. Synergies, composed more of nebulous revenue improvements than hard cost cuts, are projected by enthusiastic analysts to add between £1.6bn and £4.6bn in uplift to the value of the merged business.
Minority shareholders in Xstrata are well-placed to secure a preferential chunk of this value, even if Mr Davis has suddenly become less demanding. Glencore, which is 83 per cent owned by its management, cannot vote its Xstrata stake in favour of the deal. But the 20 per cent premium to the undisturbed price mooted by some analysts looks ambitious.
The BC Partners workout
Private equity partners must develop tremendous upper body strength. All that chucking people off the boards of companies that they own. They can stay fit without joining a gym such as Fitness First. The chain has just parted company with its chief executive, finance director and UK managing director. Private equity owner BC Partners has slung the trio out as pressure mounts on the lossmaking fitness group’s banking covenants.
Running a buy-out is the grass that looks greener to many executives on the quoted side of the corporate fence. The sale or flotation of the business could trigger a whopping pay-out.
However, hard feelings are common among members of buy-out teams who never get that far. Slung out for missing profits targets, they may take a steep haircut on the value of the unquoted shares that they are required to sell. Not the “exit” they had envisaged. The downturn is swelling their numbers.
Colin Waggett, chief executive of Fitness First, did pretty well to hang on for seven years. Lombard has met ex-buy-out guys who lasted only months. Private equity bosses talk a lot about incentivising management. But a big stick is part of the process, as well as the better-publicised carrot.
Elf and Safety
A surreal collision of Christmas jollity and health and safety law is detailed on the Lexology legal website. The Appeal Court has found that a company running a Santa’s grotto in a London department store breached its duty by allowing a visitor to trip on a plastic icicle. “At first instance, it was found that neither Santa nor the Elf could have seen the icicle as it was partly hidden by a toy train,” writes law firm Eversheds. However “the Court of Appeal found that if the icicle was there to be fallen over, it was there to be seen”. In conclusion: “The court was [therefore] less convinced as to the thoroughness with which the Elf and Santa discharged their duties.” Next Christmas, look out for grottoes festively decked with trip hazard signs and safety tape.
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