Mick Davis, the 54-year-old South African former cricket umpire, will receive a 28.8 million-pound ($44.4 million) bonus over three years for taking the job of chief executive officer at Glencore Xstrata (XTA) Plc.
Davis, who’s headed Xstrata Plc since 2001 and increased its market value more than 80 times, will get an annual “retention award” of 9.6 million pounds for staying after a takeover by Glencore International Plc, Xstrata said yesterday. Seventy-three senior managers and executives may share as much as 250 million pounds under incentives and stock-performance plans, the mining company said.
The payments, which would make Davis the best-remunerated mining CEO, may pose a hurdle to the deal after 36.5 percent of Xstrata investors voted against the directors’ pay report last month. Glencore (GLEN) and Xstrata agreed to an all-share combination in February to create the fourth-biggest mining company. Glencore’s bid values the 66 percent of Xstrata it doesn’t already own at 18.6 billion pounds.
“Shareholders don’t like pay just for showing up, the preference is for pay to be linked to performance,” Jeff Largey, a mining analyst at Macquarie Group Ltd. in London, said by phone. “There’s been momentum in recent shareholder votes and I would expect that to persist, but at this point if you’re a shareholder of Xstrata you’re pretty much in favor of the deal going through.”
Holders of Zug, Switzerland-based Xstrata will vote on Glencore’s bid and the incentives on July 12. A threshold of 50 percent approval on the payments is required for them to pass, while 75 percent is needed to confirm the merger.
Xstrata agreed to the takeover after Baar, Switzerland- based Glencore, the world’s largest publicly traded commodities supplier, offered 2.8 of its shares for each of Xstrata’s. Shareholders of Glencore vote on July 11.
Xstrata “considered very carefully the management incentive arrangements for the merger, particularly in light of the heightened public debate about executive remuneration,” Chairman John Bond said in a statement yesterday. Two-thirds of Davis’s incentive bonus will be paid in cash, the rest in stock.
Glencore said the incentives are designed to “ensure Xstrata shareholders’ interests are reflected in the combined group to balance the influence of Glencore management,” according to a prospectus posted on its website.
“While these payments are eye-catching, they’re not going to be enough of an obstacle to prevent shareholders from voting in favor of the deal,” Macquarie’s Largey said. “It definitely does show how Glencore views Xstrata management as key to the success of this merger. They are getting paid a pretty handsome sum.”
Xstrata paid Davis 2.86 million pounds in base salary and bonus last year, compared with the 2.82 million pounds BHP Billiton Ltd. (BHP) paid CEO Marius Kloppers, the 1.01 million pounds Rio Tinto Group CEO Tom Albanese got and the 2.13 million pounds paid to Anglo American Plc (AAL) CEO Cynthia Carroll, a UBS AG comparison published May 16 shows.
Ivan Glasenberg, the Glencore CEO who will be Davis’s deputy, was paid a salary of 925,000 pounds. About 13.6 percent of shareholders also opposed the re-election of Glasenberg as an Xstrata director at the May 1 vote.
Davis will be paid a salary of 1.5 million pounds at the combined company, Glencore said yesterday.
Shares of both companies have slumped 23 percent since their agreement was announced Feb. 7. That’s cut the value of the offer for the Xstrata shares that Glencore doesn’t own from a high of 26.4 billion pounds on Feb. 3, when Xstrata confirmed an approach, to as low as 18.6 billion pounds yesterday.
Glencore declined 1.3 percent to close at 340.5 pence in London trading prior to the release of the merger documents. Xstrata fell 1.8 percent to 922.5 pence.
Glencore is paying as much as $80 million in fees on the transaction, while Xstrata’s bill will be as much as $116 million, a document on the merger published by the companies shows. Glencore is working with Citigroup Inc. and Morgan Stanley as financial advisers, while Xstrata has tapped Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.
The commodities trader has faced calls from Xstrata investors including Schroders Plc (SDR), Fidelity Worldwide Investment and Standard Life Plc (SL/) to increase its bid for Xstrata, the largest exporter of coal burned by power stations. Glasenberg, 55, has rebuffed those arguments, saying in a March 5 interview he was a “little lost” at expectations of a raised offer.
Glencore won’t be allowed to vote its holding in Xstrata on the merger, according to the U.K.’s takeover code, putting a final decision into the hands of the shareholders who control the rest of the company. That means about 16 percent of Xstrata’s holders have the power to block the deal.
The chances of Glencore completing the takeover have increased after Qatar Investment Authority spent more than $3 billion buying a 9.5 percent stake in Xstrata since the deal was announced, Jefferies Group Inc. said May 10. Still, Qatar may not support the deal “at any cost,” Societe Generale SA analysts wrote in a report May 30.
“We still believe that, in the short term, the risk/reward opportunity for Xstrata shareholders has more or less evaporated,” Alain William and Abhi Shukla wrote in the Societe Generale report. “We still expect Glencore and Xstrata’s friendly all-share merger agreement to proceed at, or very close to, the agreed merger ratio.”
The companies yesterday reaffirmed estimated cost savings of about $500 million as a result of the combination, mostly from marketing operations.
They “continue to expect to receive all relevant merger approvals” to complete the deal by the third quarter, Xstrata said. Glencore said it’s yet to make a formal filing with the European Commission, which would then start the so-called Phase 1 period of 25 days of studying the combination. If the commission refers it to a so-called “Phase 2” investigation, the merger will lapse, Glencore said.
A combined Glencore and Xstrata will have operations and projects in 33 countries with 101 mines and more than 50 metallurgical facilities. It will have about 130,000 workers.
Davis grew up in South Africa’s Eastern Cape, where he became the country’s youngest qualified cricket umpire. He graduated with a bachelor’s degree from Rhodes University, before becoming an accountant.
When he joined Xstrata in 2001, it had a market value of about $500 million and about the same level of debt. Within two months of his arrival, the company had to seek a waiver from banks on its debt covenants. Xstrata now has a market value of 27.7 billion pounds and posted 2011 sales of $33.9 billion. Under Davis, it has gone from having a staff of fewer than 2,500 to a workforce exceeding 70,000 in 20 countries.
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