Shadowy Swiss-based mining group Glencore is set to bail out engineering and construction group Henry Walker Eltin in a deal which could be very profitable for Glencore. Fin d out why below:

Glencore, the shadowy Swiss-based commodities trader and investor, will take control of ailing engineering and construction group Henry Walker Eltin if a $100 million bailout unveiled today is successful.

The deal could very well become something of a proxy for the bigger and more strategic battle for control of WMC Resources by Glencore’s associate, Xstrata – also a somewhat shadowy Swiss-based mining group.

The terms of the deal show Glencore, the marketer of all the minerals and metals produced by Xstrata (including from MIM in Queensland), has driven a very tough deal with HWE.

If fully implemented Glencore will end up with three members of a seven person board and effective control of the engineering group and contract miner, which has suffered from slumping earnings and nervous financiers for the past three months.

The deal, announced here, comes after HWE shares were suspended on Monday to allow the deal to be finalised. It will see Glencore pump $100 million into HWE via a private placement of $60 million in convertible preference shares and $40 million in a fully underwritten rights issue to all shareholders at 40c a share (HWE shares were suspended at 43c, the last sale last Friday).

There are some juicy fees along the way for Glencore for its time and trouble. A commitment fee of $2.25 million, an underwriting fee of $1.75 million and a break fee of $2.75 million if HWE ends the deal or finds solace in the balance sheet of another suitor, which at this stage is unlikely.

The convertible preference share will be converted at 40c each in the ratio of five HWE shares for every two preference shares. Any dividends paid over the five year life of the preference shares will reduce the conversion price.

Glencore not only already markets all the minerals and metals from Xstrata, it is poised to get significant gains from the $7.4 billion Xstrata bid for WMC Resources. Here’s a story from the SMH about Glencore’s interest in the commodities produced by WMC Resources: Glencore keen to grab WMC marketing rights

Approval of the HWE deal would be a fillip for the Xstrata bid for WMCR as Glencore’s presence in the background and share register of Xstrata is considered to be something of a hindrance at the moment, especially given the uranium interests of WMCR.

Glencore has been mentioned in connection with the aid for oil scandal involving the United Nations and Iraq. Here’s an interesting column from Bob Gottliebsen in The Australian with background – Glencore doubts nuke takeover ambitions

The West Australian government has urged the Federal Government to say no to the Xstrata bid for WMCR because of the way the Swiss group handled a mine in WA and closed it, despite receiving millions of dollars in government aid.

To get the deal with Glencore, HWE will have to obtain shareholder approval (a given because of the strong support from the founding shareholders, including chairman Neville Walker), get new bank funding in place and new leasing arrangements and obtain FIRB approval.

The money raised by the Glencore deal will pay off HWE’s syndicated loan facility and other ‘financial obligations’ as well as provide new working capital.

From the tenor of the announcement and the structure and type of deal struck with Glencore, it is clear the only alternative open to HWE was to convince the banks to restructure the debt.

As Australian banks do not do debt for equity swaps in these sorts of workouts, that would have meant probably administration for HWE without the injection of new cash from Glencore and its balance sheet to support HWE as it recovers.

But there is the prospect of WMCR, which might indicate that Glencore, in doing this deal, has its eye on a much bigger prize and game.

HWE shares surged when trading resumed, rising 11c to a high of 54c before settling back to 45c on turnover of more than 11 million shares as investors bought the turnaround story and Glencore’s involvement.

But an Open Briefing interview with chairman Neville Walker raises more questions about the level of competence at HWE. For instance, Neville Walker does not adequately explain how the company managed to get into trouble after raising $44 million in new equity in the middle of the year.

From his comments this money must have evaporated or been lost somewhere in transit. Why else would the banks develop a “lack of confidence in the company”, to use Mr Walker’s words?

HWE raised the $44 million through a placement to big investors at 84c a share which raised $ 35 million. The remainder was to come through a shareholder purchase plan.

Then CEO Bruce James, who departed several months ago, said the money would be used to strengthen the business which was being restructured. Words, money and not much sense, when viewed against what has actually happened!

All previous statements, are in the famed Monty Pythonesque phrasing, ‘inoperative’ in that they no longer have any relevance really to what is still an unexplained basket case.

No wonder Neville Walker and the others leapt into the arms of Glencore. Administration or collapse might have set off more inquiries into how the company has been managed this year and how what was on the surface, a thriving engineering and construction group, with ambitions, was allowed to become a basket case.

The reasons why the banks in the syndicated loan facility lost confidence in HWE has not been explained. Banks do not lose confidence in customers who do the right thing, maintain agreed interest cover and cash flow covenants, and also make profits.

Peter Fray

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