Xstrata's Results Cast Doubt on Glencore Merger

LONDON -- Anglo-Swiss miner Xstrata (LSE: XTA.L  ) released its interim results this morning. The 27 billion pound firm, which is the subject of a "merger of equals" bid from fellow FTSE 100 group Glencore International (LSE: GLEN.L  ) , reported a slump in profit but lifted its dividend by 8%.

The results reignited speculation on whether Glencore's bid to merge with Xstrata will go ahead after what has lately been a deafening silence on the subject.

Glencore offered 2.8 shares for each Xstrata share earlier this year, but in a surprise move shortly before shareholders were scheduled to vote on the deal on July 11, Xstrata's second-largest shareholder, Qatar Holding, demanded Glencore improve its offer to 3.25 shares.

The vote on the deal was pushed back to Sept. 7, and Glencore and Qatar have been locked in talks ever since. What impact will Xstrata's results have on the negotiations?

Xstrata's lackluster results
Xstrata reported a 7% fall in revenue for the first six months of the year, but a whopping 42% drop in operating profit due to falling commodity prices took its toll. The company also announced it had reduced its planned spending for 2012 by $1 billion.

However, the operating profit of $2.45 billion was ahead of analysts' forecasts of around $2.3 billion, and despite the reduction in planned spending, 10 major projects will be under way by the end of 2012 -- right on schedule.

Xstrata's board is proposing to hike the interim dividend by 8% to $0.14 per share, saying this reflects "our confidence in the medium-term outlook for our business and prospects and our robust financial position."

Nevertheless, Glencore, whose commodity-trading arm can offset weak metal prices, is expected to report a smaller fall in profit than Xstrata when it releases its results on Aug. 21.

Deal or no deal?
On the face of it, Xstrata's half-year results, expectations for Glencore's interims, and consensus full-year profit figures for the two companies that imply a share ratio of about two combine to strengthen the argument of Glencore's hard-nosed deal-maker, Ivan Glasenberg, that the offer ratio of 2.8 is enough of a premium.

Meanwhile, Xstrata's results, coming in the trough of a cyclical downturn in commodity prices, will do nothing to dent Qatar's belief that Xstrata's assets are worth more than Glencore's offer and that Xstrata has good long-term prospects as a stand-alone company (and by "long-term," Qatar means 10 to 20 years).

At present, Xstrata's shares are trading at 902 pence, and Glencore's stand at 336 pence -- a ratio of under 2.7, suggesting the market isn't entirely convinced Glencore will increase its offer and that Qatar, which has the support of several other significant shareholders, just might be prepared to foil the deal.

With slower economic growth in China and the sovereign-debt crisis in Europe hurting commodity demand, Xstrata isn't the only miner suffering. Fellow FTSE giants BHP Billiton, Rio Tinto, and Anglo American have also recently announced plans to review or lower their capital investment, and the whole sector is currently under a cloud.

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G A Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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