Xstrata board recommends Glencore deal

October 8, 2012

Facing a deadline to either endorse or reject the proposed $70 billion merger with Glencore International, Xstrata’s board of directors formally recommended the merger to its shareholders.

The process, new for Xstrata, is meant to navigate controversy over roughly $200 million in retention payments designed to keep about 70 Xstrata managers from leaving the combined company.

Under the old structure, the deal could go forward only if the payments were approved. Now, it can pass without them.

The change was a key concession from Xstrata’s board, which regards the payments as essential to the success of the new company. The payments face stiff opposition from some shareholders, including BlackRock Inc., who are opposed in principle to such arrangements, The Wall Street Journal reported.

But some big Xstrata shareholders, such as Qatar Holding LLC, have indicated they would support the deal only if the payments were included. Xstrata’s business is expected to account for more than 80 percent of the combined company’s profit, which the board has cited as a reason why retaining its key executives is important.

The deal, if approved, would create the world’s third largest mining business that would hold an estimated 11 percent of global mined zinc production.

To steer through the retention-payment thicket, Xstrata's board signed off on an unusual voting process.

First, Xstrata shareholders will be asked to vote on two resolutions: one approving the deal on the condition that the retention payments are included, and the other approving the deal on the condition that they aren't. Shareholders will then vote on the retention plan. Depending on the outcome of that vote, one of the first two resolutions would be discarded and the prior vote on the other would determine the deal’s fate. The deal has an approval threshold of 75 percent of Xstrata’s shares while the bar for the retention payments is 50 percent, according to The Wall Street Journal.

The way the deal was constructed before, there were simply two votes, one on the deal and the other on the pay plan. Shareholders had to approve both for the deal to go forward.

Since Glencore can’t vote its 34 percent stake in Xstrata, and taking into consideration the expected turnout, people close to the deal estimated that “No” votes from just 12 percent of Xstrata shares would be enough to kill the merger.

Xstrata’s board recommended that shareholders vote in favor of the resolution that includes retention and against the one that doesn’t. It also recommended that they vote for the retention resolution.

While the new arrangement is expected to put the deal on sounder footing, there is still no guarantee that shareholders ultimately will bless the merger or that the new voting plan won’t somehow backfire.

The shareholder votes are expected to take place around the end of this month. The companies said they expect to get regulatory approval from China, South Africa and the European Commission by year-end. Xstrata and Glencore didn’t revise their earlier estimate that the deal would close this quarter.
 

 

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