How shareholders shaped the Xstrata Glencore merger

SHAREHOLDERS in Xstrata, the mining company, vote today on whether to approve its mega-merger with Glencore, the commodities group. If passed, the deal will create a £50bn mining and global commodities marketing giant. But reaching this point hasn’t been easy. At nearly every step of over ten months of negotiations, shareholders have successfully made their influence felt.

Concern has centred on two key issues. Firstly, Xstrata shareholders argued that the exchange ratio offered by Glencore did not offer them adequate value. Secondly, a management incentive arrangement – designed to retain members of the Xstrata management team – was attacked as unnecessary and excessive. Disagreement on these points forced an October vote on the deal to be postponed.

This pressure made a substantial difference. Since October, Glencore improved the proposed exchange ratio from 2.8 to 3.05 Glencore shares in exchange for each Xstrata share (25.5 per cent higher than the average ratio calculated between 3 and 6 September 2012). This increase led Qatar Holdings (Xstrata’s largest independent shareholder) to move in support of the deal. It has now publicly stated that it will vote in favour of the offer.

However, in a throwback to this year’s shareholder spring, it is the management incentive arrangements which have fallen under the most intense scrutiny. They will form the centre of attention at today’s vote, and it is here that Xstrata shareholders could again show their influence. Firstly, Xstrata decoupled the merger vote from the vote to approve the retention scheme. According to Sir John Bond, chairman of Xstrata, this would “enable shareholders to vote in line with their convictions in respect of the retention arrangements, without influencing their voting intention on the new scheme”. Secondly, the package was softened, with some elements subject to performance conditions and paid in shares.

And decoupling the votes could have interesting consequences. Qatar Holdings has said that it will not vote on the retention resolution as it is “conscious of the sensitivities concerning governance issues in the UK and does not feel it appropriate to influence the outcome either way”. Given this decision, Glencore and Qatar, which together hold about 46 per cent of Xstrata, cannot or have elected not to vote on these arrangements.

Xstrata’s smaller shareholders will therefore have a strong influence on the outcome. With investors like Standard Life questioning the incentives, and shareholder advisory firms like ISS recommending against the resolution, it is unclear whether Xstrata and Glencore will get the approval they are seeking.

With the merger looking like it will be approved, but with the management incentives hanging in the balance, the merged entity will be born under heavy shareholder scrutiny. It remains to be seen, however, whether the management incentives will be necessary for the short-term success of the enlarged group.

Alexander Keepin is partner and co-head of mining at Berwin Leighton Paisner.