Appeasement appeals as Glencore closes in

Xstrata and Glencore have been able to separate an executive pay hurdle via a neat array of voting options. Now the vote looms as a game-changer for the global mining industry.

It was unthinkable that that the $87 billion merger of Xstrata and Glencore would be scuttled by the plan to make the senior executives of Xstrata a measly $200 million richer in return for sticking around.

Almost as unthinkable, apparently, as Glencore chairman Ivan Glasenberg not ending up as top dog once he’d agreed to more dilution for himself and other Glencore shareholders. Xstrata chief executive Mick Davis, meanwhile, bows out with almost $50 million cash, saying: "all yours Ivan”.

Glasenberg has been trying to merge with Xstrata for five years and is now within a bee’s appendage of success.

Tonight in London, Xstrata shareholders will be presented with a slightly bewildering, but very clever, array of boxes to tick in the upcoming vote on the merger: vote against the deal; vote for the deal and for the $200 million retention packages for senior executives; vote for the deal but against the retention packages; support the merger whatever happens with the retention packages.

Note that there is no option to vote for the retention bonuses but against the deal, which would be a relief to shareholders.

The reason for the complex voting array is that the retention bonuses require 50 per cent to pass, while the merger requires 75 per cent.

The original deal was going to be 2.8 Glencore shares for every Xstrata share but that was knocked back by 12 per cent shareholder, the sovereign wealth fund of Qatar. It also involved Mick Davis continuing as chief executive of the merged group.

In early September Glasenberg agreed to up the ratio to 3.05 to 1, but demanded, in return, that he be the boss. In effect it has become a takeover, not a merger.

Mick Davis was promised £29 million ($48 million) to go away and the 70 top executives – who are all very loyal to Davis, for whom they’ve been working for 11 years – were promised £140 pounds ($230 million) if they stayed for at least three years. That’s an average of $3.3 million each on top of their salaries.

Anyway, Blackrock Asset Management, another significant shareholder, kicked up about that and it seemed the deal might fall at the last hurdle. Glasenberg couldn’t risk all the senior managers making off with Mick.

Over the weekend, though, Glasenberg came up with a voting structure that means Blackrock and the other corporate governance nuisances can vote against the retention bonuses without bringing down the merger. Job done.

The logic of combining a commodity trading house with a mining company does seem compelling in this era of spot markets for bulk commodities.

Xstrata got its start in 2002 by buying Glencore’s coal mines in South Africa and Australia and then a year later bought MIM Holdings for the bargain price of $2.9 billion.

Putting Glencore and Xstrata together entirely presents a difficult challenge for BHP Billiton and Rio Tinto because it’s not a merger that’s just about size: it represents a unique vertical integration in mining, combining production with marketing in a way that has never been done before.

If it works, BHP and Rio won’t be able to compete just by getting bigger, but perhaps by rekindling their own merger. They would need to acquire marketing and trading expertise.

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