Xstrata, Glencore Under Pressure to Amend Deal - WSJ.com

#Xstrata PLC and #Glencore International PLC are under intense pressure to amend their proposed merger as people close to the matter said it is becoming increasingly clear shareholders will block the landmark deal on its current terms.

Xstrata, Glencore Scramble to Save Deal

By DANA CIMILLUCA And JOHN W. MILLER

Updated June 27, 2012, 5:32 a.m. ET

Global commodities giants Xstrata PLC and Glencore International PLC are under intense pressure to amend their proposed merger as people close to the matter said it is becoming increasingly clear shareholders will block the landmark deal on its current terms.

The deal, creating a company with a market value of some $60 billion, has been touted as a potential reshaping of the global mining industry. But it is running into a buzz saw of opposition on two fronts: price and executive compensation.

Reuters

The headquarters of Swiss commodities trader Glencore's in Baar, near Zurich.

At issue is both the proposed price Glencore would pay—2.8 of its shares for each Xstrata share—and a £173 million ($270 million) retention package for senior Xstrata officials. Many investors have cried foul over the package at a time when opposition to lavish executive pay is running high in the U.K.
Xstrata has proposed to Glencore new terms for the retention package, according to a person familiar with the matter, in a move that could put the focus on investor demands for Glencore to improve the share ratio.
Xstrata shareholders are scheduled to vote on the deal July 12. In order for it to go forward, they must approve both the share ratio and the retention package in separate votes.
Based on feedback shareholders have provided in recent meetings, it is likely that if both aren't revised, the merger will get blocked, according to two people familiar with the matter.

Representatives of the two companies are working to amend the deal and are aiming for an agreement on new terms in the next few days, though it isn't clear they will be able to reach one. If they aren't able to hammer out new terms, the merger, which would create the world's fourth-largest mining company, is in danger of collapsing.
Adding to the urgency, Qatar Holding, which had been thought to favor the merger on its current terms, said in a statement late Tuesday that it believes a share ratio of 3.25 would be more appropriate. Qatar recently built a 10% stake in Xstrata and is the Anglo-Swiss miner's largest shareholder aside from Glencore, which already owns a 34% stake.
It is unclear whether U.K.-listed Glencore and Chief Executive Ivan Glasenberg will bend on the share ratio, given that he has said in the past that more-generous terms threaten to make the deal uneconomical for the commodities-trading firm.
Xstrata investors' concerns, which had been festering since the deal was announced in February, have been building since the company last month sent its shareholders a 144-page document detailing the retention payments.
Under the plan, Xstrata CEO Mick Davis would receive $14.9 million a year through 2015, for a total of $44.7 million. The retention payments carry no obligation to meet performance targets. Xstrata has said the payments are necessary to keep top managers at the firm, but the people said Tuesday that a performance element would likely need to be added to win shareholder approval. Indeed, one of the people said late Tuesday that Xstrata has proposed to Glencore that the payments be made in stock instead of cash and that for the senior executives they include a performance condition tied to cost savings.
The retention package must be approved by a simple majority of Xstrata's non-Glencore investors, while the overall deal has a 75% approval threshold of non-Glencore investors. That means that if just a third of Xstrata shares are voted against the retention package—or less depending on turnout—it would be defeated.
The bar for rejection on the overall deal vote is even lower, at approximately 16%.
On Tuesday, Glencore shares fell 1.8% £3.03 in London trading; Xstrata fell 1.1% to £7.86 in London.
Write to Dana Cimilluca at dana.cimilluca@wsj.com and John W. Miller at john.miller@wsj.com
Corrections & Amplifications
Qatar is Xstrata's largest shareholder aside from Glencore. An earlier version of this article incorrectly said Qatar was Xstrata's largest shareholder.

A version of this article appeared June 27, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Xstrata, Glencore Scramble To Save Deal.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

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