Jefferies expects commodities marketer and producer Glencore to bump up its proposed merger ratio for Xstrata and says that following the stocks' recent underperformance, shares of both groups are now more attractively valued.
The broker had said recently that mining peers BHP Billiton and Rio Tinto would likely outperform Glencore and Xstrata. However, after the latters' near-15% decline since early June, it says that the relative underperformance may be coming to an end.
"We continue to have a positive view on shares of BHP Billiton and Rio Tinto, which are our top picks for long-term investors. But at this point, we would recommend that investors buy shares of Glencore and Xstrata as well."
Jefferies thinks that Glencore will eventually raise its proposed merger ratio from 2.8 to at least 3.0 Glencore shares per Xstrata share in order to win the approval of Xstrata shareholdings, especially Qatar Holdings, the 10.4% stakeholder that has come out and demanded better terms.
"We believe a merger between Glencore and Xstrata is strategically important for both companies, and we have a positive view on the long-term fundamental outlook for the merged company. We would expect Glencore and Xstrata shares to perform well on any developments that would increase the probability of the merger succeeding."
If the deal were to fall through, then there would be less than 10% relative downside to the share price of each, the broker estimates.
Shares of Glencore were down 1.4% on Monday morning, while Xstrata was trading 2.17% lower.
Datafeed and UK data supplied by NETbuilder and Interactive Data.
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