Monday, October 1, 2012

Xstrata board backs Glencore's $33bn takeover offer

Xstrata's board members have backed Glencore's revised offer after gaining assurances over the combined company's board and decoupling approval of incentive payments from a vote on the offer.

Xstrata Plc (XTA)'s board recommended shareholders back a $33 billion sweetened takeover offer by Glencore International Plc (GLEN) after gaining assurances on board composition and delinking votes on the bid and bonus payments.

Shareholders will be asked to consider two resolutions: one to approve the takeover along with 144 million pounds ($232 million) of retention bonuses and a second that excludes the pay question, Xstrata said in a statement today. This means the deal can proceed even if the incentive payments are rejected.

The recommendation brings Glencore's billionaire Chief Executive Officer Ivan Glasenberg one step closer to his goal of creating the world's fourth-largest mining company. The combination, five years in the making, would couple Glencore's global trading operations with Xstrata's coal, copper, and zinc production, establishing a resources group with about 130,000 employees in more than 40 countries.

"It's risky to split the vote, but it's a calculated gamble," Paul Gait, an analyst at Sanford C. Bernstein & Co. in London, said in e-mailed comments. "If the now separate measures pass, Glencore is free from the taint of railroading through a compensation package against shareholder wishes."

The vote on approving the offer requires 75 percent approval, while the retention packages require 50 percent support in a separate vote. Zug, Switzerland-based Xstrata's board unanimously recommended that shareholders vote in support of the resolution that requires approval of the retention package, the statement shows.

Board Seat

Glencore last month raised its offer to 3.05 of its shares for each in Xstrata from 2.8, after investors said the original bid undervalued the Swiss mining company. The Baar, Switzerland- based commodities trader invited Xstrata to propose changes to the bonus package to ensure shareholder backing for the year's biggest takeover.

Xstrata, the largest exporter of thermal coal, delayed its response to Glencore's revised proposal for a week to resolve issues over management and to determine who will take a seat on the combined board vacated by its CEO Mick Davis.

"A current Xstrata Group operational executive will replace Mick Davis upon his departure as an executive director of the board of the combined entity, to preserve the majority of Xstrata directors on the board," Xstrata said today.

Davis, who will be the CEO of the combined group for six months before handing over his post to Glasenberg, won't receive any retention bonus, according to the statement. Davis will receive his contractual termination fee, which is about $13 million according to Xstrata's annual report.

European Commission

New documents on the deal should be sent to shareholders this month and dates announced for new meetings to vote on the transaction, the statement shows. Glencore is expected to notify the European Commission of the deal shortly and it is anticipated that the regulatory approvals needed for the transaction will be secured by Dec. 31.

Glencore's increased bid followed a threat by Qatar's sovereign wealth fund, Xstrata's largest holder after Glencore, to block the deal in the absence of a higher offer. Qatar Holding LLC said in June that a bid of 3.25 shares would be "more appropriate." As little as 16.5 percent of investors can prevent the merger because Glencore can't vote its 34 percent stake.

The revised offer reflects 17.6 percent premium over the ratio of 2.59 implied by undisturbed closing share prices on Feb. 1, Xstrata said today. The companies on Feb. 2 confirmed that they were in talks for the transaction. Xstrata shares advanced 1.5 percent to 971.7 pence at 8:05 a.m. in London, while Glencore slid 0.5 percent to 341.25 pence.

Shareholder Convictions

A successful acquisition would be the second-largest in the mining industry, behind Rio Tinto Group's $38 billion purchase of Canada's Alcan Inc. in 2007. Global mining deals swelled to $98 billion last year, the highest volume since 2007 according to data compiled by Bloomberg, as commodity demand in developing nations and the deteriorating quality of mineral reserves pushed producers to seek greater economies of scale.

"We have decided to decouple the resolutions to approve the merger from the resolution to approve the revised management incentive arrangements," Xstrata Chairman John Bond said in today's statement. This will "enable shareholders to vote in line with their convictions" without influencing their approval of the Glencore combination, he said.

Source: Bloomberg