Investor concerns over �240m of retention packages for top Xstrata staff threaten to derail tie-up
Xstrata and Glencore are hastily rewriting the terms of their �50bn tie-up in an effort to stem a mounting shareholder revolt over �240m of retention packages for top Xstrata management which threatens to derail the merger.
Glencore told the stock market on Wednesday that it was considering proposals put forward by Xstrata to change the pay deals but made no reference to the stunning intervention by a major shareholder in Xstrata to reject the price being paid by Glencore.
One of the stock market's highest profile mergers, the deal is on the brink of collapse after Qatar, the sovereign wealth fund that has amassed a stake of over 10% in Xstrata, said late last night that it wanted a higher price.
The intervention by Qatar came at the end of a day of frenzied speculation that the management of Xstrata had been rethinking the terms of the tie-up with its largest shareholder Glencore because of controversial retention packages for 73 Xstrata staff.
On Wednesday Glencore confirmed potential changes: "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."
Qatar made no reference to the retention packages in its surprise statement, issued after the markets had closed on Tuesday, that it wanted the terms offered by Glencore ? which is offering 2.8 of its shares for every Xstrata share ? to be raised. Until now, the City had assumed that the sovereign wealth fund was preparing to throw its sizeable stake, which has been amassed since the deal was first announced in February, behind the deal.
Performance conditions are likely to be attached to the retention packages which include �29m for Xstrata chief executive Mick Davis, who can walk away with the entire sum in two years if he leaves under certain circumstances.
The Qatar fund, which is being advised by bankers at Lazard, caught both companies on the hop after saying that "whilst it sees merit in a combination of the two companies" it wanted the terms set at 3.25 new Glencore shares for every existing Xstrata share. These terms, it said, "would provide a more appropriate distribution of benefits of the merger whilst properly recognising the intrinsic stand-alone value of Xstrata".
Xstrata shares opened 1% higher at 793p while Glencore edged 0.5% lower to 301.5p.
There are just days before any changes to the deal can be made under the City's strict Takeover Panel code if the votes are to proceed on 12 July and amid a mounting wave of shareholder anger about the retention packages.
Richard Buxton, head of UK equities at Schroders, who has opposed the terms from the outset, said late on Tuesday: "It is time to take the deal off the table and come back with new terms. From day one we've said this is a deal Glencore needed more than Xstrata given Xstrata's balance sheet and cash flow. The strengths of Xstrata's balance sheet and cash flow was never reflected in the exchange ratio".
On 12 July Xstrata shareholders are supposed to vote not only on the terms of the deal but also the retention packages.
Unusually, the two votes are linked ? if shareholders vote against the pay deals the merger will fall through.
The deal had already looked to be in doubt after one of the most vocal opponents declared on Monday that there was "no support" for the transaction, which has been expected ever since Glencore floated on the stock market last year.
David Cumming, head of equities at Standard Life, also indicated that he felt the position of Davis was in doubt. "I think to preserve the integrity of the board ? they're almost going to have to hand over to Glencore, makes it a takeover rather than a merger and that might involve Mick Davis standing down.
"Without that change of tack I just don't see how the deal can actually go through now. There's just no support for the deal as it stands and the credibility of Xstrata's board and management team aren't there any more."
The Xstrata board is chaired by Sir John Bond, the former chairman of HBSC, who will now face pressure from shareholders to explain his staunch defence of the retention packages for the management and his own position - and that of other members of the board - may also be questioned.
Source: http://www.guardian.co.uk/business/2012/jun/27/xstrata-glencore-merger-shareholder-revolt
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