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Xstrata’s $385 Million Glencore Payout Sparks Outcry

Xstrata Plc investors say a potential 250 million-pound ($385 million) payout to 73 managers and executives of the mining company after its takeover by Glencore International Plc is “insensitive” and “unacceptable.”

Standard Life Plc, Fidelity Worldwide Investment and Royal London Asset Management, holding a total of more than 3 percent of Xstrata, have criticized the payments announced yesterday. Investors will vote on the so-called incentive arrangements on July 12 with 50 percent approval needed to pass the deal.

It’s “unacceptable and depressing” and “makes supporting Glencore’s already inadequate offer for Xstrata even less palatable,” David Cumming, Edinburgh-based head of equities at Standard Life Investments, said in an e-mailed statement today. “Consequently we still believe it should be opposed.”

The payments may bolster opposition to the deal after 36.5 percent of Xstrata investors voted against the directors’ pay report last month. Xstrata’s Chief Executive Officer Mick Davis, 54, is the biggest recipient under the plan, netting 28.8 million pounds in bonuses in the three years to 2015.

It’s “provocative and insensitive given the current climate,” Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide, said in an e-mailed statement. “In effect the interests of management have been placed ahead of those of shareholders.”

Glencore, owner of about 34 percent of Xstrata, agreed to an all-share combination in February to create the fourth-biggest mining company and generate about $500 million a year in cost savings. The offer of 2.8 shares for each Xstrata share currently values the stock Baar, Switzerland-based Glencore doesn’t already own at about 18.4 billion pounds.

Best Practice

The payments “do not reflect best practice and fall a long way short of the principles of remuneration that Fidelity has been promoting for some time,” Fidelity’s Rossi said.

Xstrata “considered very carefully the management incentive arrangements for the merger, particularly in light of the heightened public debate about executive remuneration,” Chairman John Bond said in a statement yesterday. Two-thirds of Davis’s incentive bonus will be paid in cash, the rest in stock.

Glencore said the incentives are designed to “ensure Xstrata shareholders’ interests are reflected in the combined group to balance the influence of Glencore management,” according to a prospectus posted on its website.

Glencore declined 1.5 percent to 335.4 pence at 2:46 p.m. in London. Xstrata fell 2.6 percent to 898.3 pence.

‘Serious Concerns’

“We have serious concerns about the justification for retention payments of this scale, without any conditions attached, and also the precedent that it would set,” said Ivor Pether, a fund manager at Royal London Asset Management who holds 11 million shares of Xstrata.

Glencore is paying as much as $80 million in fees on the transaction, while Xstrata’s bill will be as much as $116 million, a document on the merger published by the companies shows. Glencore is working with Citigroup Inc. and Morgan Stanley as financial advisers, while Xstrata has tapped Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

Xstrata said yesterday it planned to pay as much as 172.8 million pounds in retention awards to the managers and executives. A further payment for existing contractual provisions for 2012 will be capped at 44 million pounds and as much as 35 million pounds worth of Glencore shares may be awarded under the 2013 share performance plan, it said.

The commodities trader has faced calls from Xstrata investors including Schroders Plc, Fidelity and Standard Life to increase its bid for Xstrata, the largest exporter of coal burned by power stations. Glencore Chief Executive Officer Ivan Glasenberg, 55, has rebuffed those arguments, saying in a March 5 interview he was a “little lost” at expectations of a raised offer.

Glencore won’t be allowed to vote its holding in Xstrata on the merger, according to the U.K.’s takeover code, putting a final decision into the hands of the shareholders who control the rest of the company. That means about 16 percent of Xstrata’s holders have the power to block the deal.

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