Bloomberg News

Glencore Said to Study Leaner Xstrata Manager Retention Offer

November 15, 2012

Glencore International Plc (GLEN) will likely seek to retain key Xstrata Plc (XTA) managers should investors next week reject the current proposal to keep about 70 executives, according to people familiar with the matter.

Glencore would offer to retain fewer Xstrata managers than the number covered by the current 144 million-pound ($228 million) package that investors are scheduled to vote on under the commodities trader’s $31 billion bid, the people said, asking not to be identified as the plan is confidential. Glencore would focus on retaining managers of Xstrata’s mining assets rather than administrative staff, one of the people said.

“This is a deeply pragmatic and rational solution to the problem and will appease a significant number of shareholders,” said Paul Gait, a Sanford C. Bernstein & Co. analyst in London. “We don’t think Glencore has the depth of operational management, given the size and scale of the mining business versus the mining business in Xstrata, to make sure the value isn’t compromised in this transition without the Xstrata management.”

Qatar Holding LLC, the second-largest shareholder in Xstrata with 12 percent of the stock, said today it plans to back Glencore’s offer to create the world’s fourth-largest mining company. It will abstain from voting on current bonus proposals when investors vote on the transaction on Nov. 20. That boosts the likelihood of both the deal completing and the payouts being blocked, given opposition from other shareholders, Liberum Capital Ltd. said today.

Investor Opposition

Xstrata advanced 1.1 percent to 958 pence by the close in London and Glencore fell 1.7 percent to 325.70 pence. Xstrata stock is at 2.94 times that of Glencore, the highest since the bid was announced in February and the most on record, indicating more investors expect the deal to be completed. Glencore is offering 3.05 of its shares for each one in the target.

The current retention plan, initially with 172.8 million pounds in executive payments before being amended, was a high- profile target of the so-called shareholder spring in which investors revolted over pay at some U.K. and U.S. companies.

Knight Vinke Asset Management LLC and Standard Life Investments oppose the payments. They are “unnecessary” and “a combination of a rather rapacious management team and a weak board,” David Cumming, head of equities at Standard Life, told the British Broadcasting Corp. Nov. 12. The firm, owner of 1.4 percent of Xstrata, will vote against the payments, he said.

Xstrata CEO

Pensions & Investment Research Consultants Ltd. have also recommended opposing the deal, citing a lack of due diligence and board independence at Xstrata. Institutional Shareholder Services Inc. and Glass Lewis urged investors to support the transaction, while calling for the bonuses to be voted down.

Under the initial plan Xstrata Chief Executive Officer Mick Davis would have received 28.8 million pounds in shares over the three years that he was set to lead the merged group. He’ll now depart within six months of the merger, Glencore said Sept. 10.

Xstrata Chief Financial Officer Trevor Reid stands to gain the most under the current plan with an award worth 11 million pounds over two years, according to a May 31 statement.

Executive Director Santiago Zaldumbide would get about 7.9 million pounds. Managers excluding executive directors stand to receive as much as 32.2 million pounds over two years. In addition, a total of 64 senior employees are eligible for 93 million pounds, according to the statement.

Qatar Holding believes retaining Xstrata’s operational management is critical to the success of the deal with Baar, Switzerland-based Glencore, the fund said today.

U.K. Sensitivities

“However, QH is conscious of the sensitivities concerning governance issues in the U.K. and does not feel it appropriate to influence the outcome either way,” it said. For that reason, it will abstain from voting on the retention incentive plan.

Officials from Glencore and Zug, Switzerland-based Xstrata, the largest exporter of thermal coal, declined to comment. Glencore holds 34 percent of Xstrata.

The takeover also needs approval from competition regulators prior to completion. The European Commission is scheduled to rule on the deal by Nov. 22 after Glencore offered unspecified concessions to the regulator last month.

The combined company would be the world’s third-biggest producer of mined copper, the largest zinc miner, and the biggest exporter of coal burned by power stations. The dominance is largest in zinc, where the group would control about 64 percent of traded volumes globally and 75 percent in Europe, Bloomberg calculations show.

Glencore has offered to sell the Nordenham zinc smelter in Germany owned by Xstrata after an earlier plan to end a zinc sales agreement with Nyrstar (NYR) NV proved insufficient to satisfy EU antitrust regulators, Reuters reported, citing two people familiar with the matter that it didn’t identify.

Qatar Holding is advised by Lazard & Co. Glencore is working with Citigroup Inc. and Morgan Stanley as financial advisers. Xstrata has hired Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Firat Kayakiran in London at fkayakiran@bloomberg.net; Matthew Campbell in London at mcampbell39@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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