Glencore Mines 9% Price Boost in Xstrata Deal (Update 1)

Updated to include additional information throughout

NEW YORK ( TheStreet) -- In an effort to keep alive the year's largest merger, commodity trader Glencore said on Friday it is raising its $34 billion February offer for miner Xstrata by 9%, in an all-stock deal that will pay an improved 3.05 Glencore shares for each Xstrata share.

The move comes after Xstrata's second largest shareholder -- Qatar Holding --- pushed for an improved share exchange ratio to the initial 2.8 conversion agreed in February. Without the support of Qatar Holdings the merger was unlikely to pass a shareholder vote scheduled for earlier on Friday, causing Glencore to suspend a shareholder meeting and increase its takeover proposal minutes before a shareholder vote.

The new bid signals that Glencore may have given new life the mining industry mega-merger at the last minute. However, amid continued shareholder unrest, the deal is still up in the air. In a Friday statement, Xstrata said that the new offer, which is now more of a takeover than a merger, "lacks sufficient information on key details."

The mining giant raised two objections to the new offer, citing both the pricing of Glencore's offer and a proposed management overhaul were the two companies to be combined.

The takeover would come at a 17.6% premium to Xstrata's shares prior to February 1 when details of a deal first emerged, in a valuation that the company said remains, "significantly lower than would be expected in a takeover." Meanwhile, the prospective replacement of Xstrata CEO Mich Davis, "represents significant risk around the retention of the Xstrata senior and operational management," the company added in a statement.

In total, Glencore Xstrata would be worth roughly $90 billion were Friday's offer to stand.

At a shareholder meeting in London on Friday morning, Glencore halted the meeting and put its $34 billion merger up for vote, increasing its all stock offer. Glencore also asked that its chief executive Ivan Glasenberg be given the CEO role of the merged company. Previously, Xstrata CEO Mick Davis was to lead the combined mining giant.

Xstrata said in its statement that it will consult shareholders and the company's independent directors as to whether to reconvene the shareholder meeting and make a recommendation on the offer.

Meanwhile, to be seen is whether the new merger price will impress Qatar Holding, which has asked that the stock conversion be raised to 3.25. Under the deal's original structure, holders of just 16.5% percent of Xstrata's shares needed to vote against the merger for it to be blocked by shareholders.

Glencore, which holds 34% of Xstrata shares, is looking to reunite the two mining giants, creating a combined company with revenue of $209 billion and pretax profit of $16 billion, according to 2011 earnings. In a sector filled with behemoths like BHP Billiton ( BHP), Rio Tinto ( RIO) and Vale ( VALE), the combined company, called Glencore Xstrata, would be the fourth largest in the sector.

The deal was expected to combine Xstrata's coal mining dominance, particularly in Australia with Glencore's commodity trading operations, wrenching out $500 million in immediate synergies and a 11% plus annual compound growth rate through 2015, according to the two companies.

It would also mark the biggest merger in the mining sector since a $38.1 billion cash deal by Rio Tinto to buy Alcan in 2007. Since then, blockbuster mining deals have been hard to cut.

In Feb. 2008, Xstrata walked away from a $76 billion cash and share offer from Brazilian mining giant Vale. Later that year, BHP walked away from a hostile $100 billion-plus all stock offer for Rio Tinto after regulatory threats and an escalating financial crisis harmed the deal.

From the outset, analysts and investions questioned whether Glencore's offer was best value for Xstrata shareholders.

"The single digit premium seems low to us, even for an all share merger of equals. While we think there is little chance of Glencore topping up the offer with cash, it would seem that there is increasing support against the merger," wrote RBC Capital Markets analyst Timothy Huff in a February note reacting to the initial terms of the deal.

"In our view, if management perceives a problem with getting past the 75% threshold, there should be an increasing chance of a higher ratio being offered should the two management teams want to complete this transaction," noted Huff.

On a valuation basis, Glencore's initial purchase price was "only a slight premium to the diversified mining group," according to FBR Capital Markets, which valued the deal at 6 times Xstrata's 2012 earnings before interest taxes depreciation and amortization, a slight premium to the sectors 4.5 times EBITDA average.

However, in the six months since the initial merger agreement, a slowdown in Chinese growth and weakness in mining sector earnings has given credence to the initial deal premium, which stood at roughly 15%.

To be seen is whether Xstrata shareholders will succumb to Glencore's higher offer, in the face of a 9% price increase and a cloudy outlook for the sector.

-- Written by Antoine Gara in New York