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Xstrata tweaks bonus packages to save Glencore merger

by Paul Whitfield | Published June 27, 2012 at 11:14 AM

Xstrata plc has agreed to change the terms of £172 million ($268 million) of bonuses written into its roughly $100 billion merger with Glencore International plc but still faces a shareholder rebellion capable of blocking the deal after its No. 2 shareholder said it would vote against the transaction.

Zug, Switzlerand-based Glencore said Wednesday, June 27, that it had received a proposal from Xstrata to amend the controversial executive retention bonuses, which include a £28.8 million bonus payable to Xstrata CEO Mick Davis by 2015 irrespective of the merged company's performance.

"Glencore confirms that it has received a proposal from the board of Xstrata in relation to certain amendments to the management incentive arrangements that were proposed in the scheme documents," Glencore said. "We are considering that proposal and will make a further announcement when appropriate."

Xstrata will have hoped that the revisions were enough to head off a looming shareholder rebellion on July 12, when investors in both companies are due to vote on the deal. That now appears unlikely after Qatar Holding LLC, which owns 10.37% of Xstrata, said late Tuesday that Glencore's all-share offer for Xstrata needed to increase by 16% to win its support.

"QH believes that an exchange ratio of 3.25 new Glencore shares for every one existing Xstrata share would provide a more appropriate distribution of benefits of the merger whilst properly recognizing the intrinsic stand-alone value of Xstrata," Qatar Holding said late Tuesday.

Glencore's current offer is 2.8 of its shares per Xstrata share. Glencore CEO Ivan Glasenberg has previously dismissed the need to improve the terms, declaring that the deal was a merger of equals that already included a premium for Xstrata shareholders.

Glencore's offer equated to an about 8% premium to Xstrata's share price based on the two companies' valuation on Feb. 1, the day before talks were announced. Xstrata shares initially moved to a premium to their valuation in the deal, in expectation that Glencore would offer a sweetener, but have more recently traded in line with the deal terms.

Qatar Holding, a subsidiary of sovereign wealth fund the Qatar Investment Authority, owns about 311 million of Xstrata's 3 billion shares. It built the majority of its stake in the months after Glencore and Xstrata first announced that they were in merger talks, suggesting that it needs an improvement to realize a short-term gain on its investment.

"We believe a bump - probably from 2.8 to 3.0 Glencore shares per Xstrata share - may be necessary to win over QH and other Xstrata shareholders," noted Jefferies International Ltd. analysts Christopher LaFemina and Seth Rosenfeld. "A bump from Glencore and a revision to the management retention awards should be the logical next steps. We continue to expect this proposed merger to happen."

Some analysts, including HSBC Holdings plc's Andrew Keen, have suggested that Glencore could pay as much as 3.3 shares per Xstrata share.

The peculiarities of the Xstrata shareholder vote mean that a rebel group of about 16.5% of Xstrata shareholders could block the deal. The vote needs the support of 75% of Xstrata shareholders, excluding Glencore, which is blocked from voting its 34% stake in Xstrata.

Standard Life plc, Schroders plc and Fidelity Worldwide Investment, which together hold about 3% of Xstrata, have already said they will vote against the deal unless Glencore improves its offer.

The terms of the deal are also likely to meet opposition from U.K. insurance companies, many of which hold stakes in Xstrata because it is part of the key FTSE 100 index. On June 21, the Association of British Insurers issued a rare "red-top" warning to its members, highlighting its concerns about the Xstrata retention packages.

ABI members account for about 17% of all investment in the FTSE All-Share index and tend to follow their lobby group's guidance where it issues warnings. The ABI's previous "red-top" warning related to the pay package of WPP plc CEO Martin Sorrell. Shareholders in the British advertising firm on June 13 voted 56% against a 60% increase in Sorrell's pay.

Xstrata's management has already had a taste of shareholder rebellion. On May 1, about 14% of votes cast at a shareholder meeting opposed the re-election of Glencore CEO Ivan Glasenberg to the Xstrata board.

Glencore declined to comment on Qatar's opposition to the deal or the prospect of a revision of the terms of the deal. Xstrata spokespeople did not return a call asking for comment.

Qatar Holdings is taking financial advice from Lazard.

Glencore is taking financial advice from David Wormsley, Simon Lindsay and Tom Reid of Citigroup Global Markets Ltd. and Michel Antakly, Laurence Hopkins, Alastair Cochran of Morgan Stanley. Linklaters LLP is providing legal counsel to Glencore.

Xstrata plc has turned to Deutsche Bank AG's Nigel Robinson, Khaled Fathallah and Nick Bowers; J.P. Morgan Ltd.'s Ian Hannam, Barry Weir and Neil Passmore; Goldman Sachs International's Brett Olsher and Luca Ferrari and Nomura International plc's William Vereker, William Barter and Shaun Treacy. Xstrata is taking legal advice from Freshfields Bruckhaus Deringer LLP's Julian Makin.

Shares in Glencore traded Wednesday at 291 pence, down 11.55 pence, or 3.8% on their previous close. Shares in Xstrata traded at 775 pence, down 10.8 pence, or 1.4%.

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