Xstrata Plc (XTA)’s board recommended shareholders back a $33 billion sweetened takeover offer by Glencore International Plc (GLEN) after gaining assurances on board composition and delinking votes on the bid from bonus payments.
Shareholders will be asked to consider two resolutions; one to approve the takeover along with 144 million pounds ($232 million) of retention bonuses; and a second that excludes the pay question, Xstrata said today in a statement. The outcome of a third vote, on the incentive payments alone, will determine which of the first two resolutions is taken into account.
The recommendation brings Glencore’s billionaire Chief Executive Officer Ivan Glasenberg a step closer to combining the two Swiss commodity companies in this year’s largest takeover. The merger, five years in the making, would couple Glencore’s trading operations with Xstrata’s coal, copper and zinc mines, creating a group with 130,000 employees in more than 40 nations.
“The separation of the two issues is right as it is for the management of Xstrata and Glencore to decide how to achieve the operational stability of the companies,” Neil Dwane, chief investment officer for Europe at Allianz Global Investors, owner of about 0.2 percent of Xstrata, said in e-mailed comments.
If the vote on retention payments is approved by 50 percent of investors, the deal’s success rests on the first resolution; if the payments are rejected, the second resolution determines the outcome. Both the first and second resolutions require 75 percent approval. Xstrata’s independent directors unanimously recommended that shareholders approve the bid and the bonuses.
“It’s risky to split the vote, but it’s a calculated gamble,” Paul Gait, an analyst at Sanford C. Bernstein & Co. in London, said in e-mailed comments. “If the now separate measures pass, Glencore is free from the taint of railroading through a compensation package against shareholder wishes.”
Xstrata intends to raise mine output by 50 percent through 2014 to benefit from growing Asian demand for coal and metals. Some investors have argued that such growth plans necessitate large retention payments to ensure the long-term commitment of senior Xstrata management. Others, including Standard Life Investments, have said that the bonus packages are excessive.
“We have always been in favor of the proposed retention arrangements to incentivize key Xstrata employees,” Glasenberg said in the statement. “Their commitment is vital as we look to capture the full synergy and value-creation benefits of the transaction.”
Glencore last month raised its offer to 3.05 of its shares for each in Xstrata from 2.8 after Qatar’s sovereign wealth fund, Xstrata’s largest shareholder after Glencore, said the original bid was too low. The merger of the two businesses would create the world’s fourth-largest mining company.
With the revised voting structure, the likelihood of the deal’s success is greater than 80 percent, Liberum Capital Ltd. said today in a note to investors. “But to our mind the key risk of a deal failure rests once again with Qatar Holdings.”
The Qatari fund, which owns about 12 percent of Xstrata, said in June that a bid of 3.25 shares would be “more appropriate.” As little as 16.5 percent of investors can prevent the merger because Glencore can’t vote its 34 percent stake. The commodities trader had invited Xstrata to propose changes to the bonus packages to ensure shareholder support.
Xstrata, the world’s largest exporter of thermal coal, delayed its response to Glencore’s revised proposal for a week to resolve issues over management and to determine who would take a seat on the combined board vacated by its CEO Mick Davis.
“A current Xstrata Group operational executive will replace Mick Davis upon his departure as an executive director of the board of the combined entity, to preserve the majority of Xstrata directors on the board,” Zug-based Xstrata said today.
Davis, who will lead the merged group for six months before handing over to Glasenberg, won’t get any retention bonus, the statement shows. He will receive his contractual termination fee of 9.6 million pounds when he leaves, Xstrata said.
“The strategic rationale for combining Xstrata and Glencore remains highly compelling,” Davis said in the statement. “My objective during my time as CEO of the combined group will be to preserve and enhance the value Xstrata’s management team has created over the past 10 years through a well-planned integration process.”
Xstrata intends to send new documents on the transaction to shareholders this month and announce voting dates, according to the statement. It expects that Baar-based Glencore will notify the European Commission of the deal shortly and that regulatory approvals will be secured by Dec. 31.
The revised offer reflects a 17.6 percent premium over the ratio of 2.59 implied by closing share prices on Feb. 1, Xstrata said today. The companies on Feb. 2 confirmed they were in talks. Xstrata advanced 2.3 percent at the close in London, while Glencore declined 0.3 percent to 342 pence.
A successful acquisition would be the second-largest in the mining industry, behind Rio Tinto Group’s $38 billion purchase of Canada’s Alcan Inc. in 2007. Global mining deals swelled to $98 billion last year, the highest volume since 2007 according to data compiled by Bloomberg, as commodity demand in developing nations and the deteriorating quality of mineral reserves pushed producers to seek greater economies of scale.
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