Glencore International Plc (GLEN) and Xstrata (XTA) Plc, seeking to complete a merger next quarter, are considering changing proposed retention payments for Xstrata executives that have drawn the ire of investors, according to people with knowledge of the situation.
Changes may include tying the 172.8 million pounds ($270 million) in planned payments to Xstrata Chief Executive Officer Mick Davis and 72 other executives more closely to the future performance of the combined company, the people said, asking not to be identified as the talks are private.
The July 12 investor votes on the merger itself and the payments are unlikely to be de-linked because Zug, Switzerland- based Xstrata’s board regards ensuring the loyalty of its top executives as essential to the combination, the people said.
At stake is a 17 billion-pound deal that combines Xstrata’s mines with Baar, Switzerland-based Glencore’s commodities trading operation to create the world’s fourth-biggest mining company. The payments, which must be approved at Xstrata’s shareholder vote for the deal to proceed, have been criticized as excessive by investors including Standard Life Plc (SL/) and Fidelity Worldwide Investment and last week attracted a so- called red-top rating, the most serious corporate governance warning from the Association of British Insurers.
“We would welcome changes to the terms,” Jane Coffey, head of equities at Royal London Asset Management Ltd., said by phone today. While reducing the amount to be paid would be helpful, “the sticking point is paying money with no strings attached to delivering any good performance,” she said.
Investors have this year registered a series of protest votes over executive compensation in the U.S. and U.K. in what has been dubbed a “shareholder Spring.”
Stock holders have rejected pay packages for executives including Martin Sorrell, chief executive officer of advertising firm WPP Plc (WPP), and Citigroup CEO Vikram Pandit, criticizing payouts they say are insufficiently linked to performance. Xstrata’s own directors’ remuneration report was opposed by 36.5 percent of its shareholders at its May 1 annual general meeting.
Glencore yesterday fell to the lowest relative to Xstrata shares since the offer, signalling a heightened risk of the bid failing. It slid to a low of 2.58 times that of Xstrata, a 7.9 percent discount to February’s agreed bid at a ratio of 2.8.
Coffey, whose firm has a 0.4 percent stake in Xstrata, said she doesn’t expect the bid ratio to be increased “because the shares are trading at a discount to the current ratio.”
Xstrata fell 1 percent to 785.8 pence today in London as Glencore dropped 1.8 percent to 302.7 pence. A spokesman for Glencore declined to comment on potential changes to executive compensation plans, as did a spokeswoman for Xstrata.
Xstrata’s Davis, 54, who would lead the combined company, stands to get 28.8 million pounds in cash and stock bonuses over three years should the takeover proceed. Glencore CEO Ivan Glasenberg, 55, who would be Davis’s deputy, said June 7 he had no choice other than to accept Xstrata’s payment plan.
Xstrata Chairman John Bond has been sounding out investors on their views of the deal in recent weeks.
“The success of the merger depends on Xstrata management transitioning into the new group to manage assets generating more than 80 percent of the combined earnings,” the company said June 21. “Retaining a stable management team with a track record of value delivery is in the interests of Xstrata shareholders.”
The ABI, whose members represent about 17 percent of the U.K. stock market, said it was concerned retention payments were being offered without any link to performance. The London-based association highlights issues without directly advising investors how to proceed.
“Following our discussions of this deal with investors in recent months, we believe that the committed ‘no’ vote might be higher than the levels indicated publicly,” Andrew Keen, a London-based analyst at HSBC Holdings Plc, wrote in a June 22 note. The payments created “specific problems” and should be separated from the merger vote, or the bid ratio revisited.
The payments can be passed with 50 percent of votes cast, while the merger plan requires 75 percent. Without a change to the offer terms, a negative vote looks likely, Keen said.
Glencore, the world’s largest publicly traded commodities supplier, is barred by the U.K.’s takeover code from voting its 34 percent stake in Xstrata. That means Xstrata investors with a joint 31.75 percent stake would be able to block the payment plan and holders with 16.5 percent could vote down the merger.