Xstrata Split With Glencore on Terms as Deadline Nears: Energy

Xstrata Split With Glencore on Terms as Deadline Nears
Xstrata is due to respond to Baar, Switzerland-based Glencore’s revised proposal by 7 a.m. London time on Oct. 1, after receiving a week’s extension. Photographer: Gianluca Colla/Bloomberg

Xstrata Plc, the largest exporter of coal used by power stations, is still at odds with Glencore International Plc over board seats and retention pay three days before a deadline for it to respond to Glencore’s revised 20.5 billion-pound ($33.3 billion) takeover bid.

Xstrata is seeking assurances that one of its executives will replace the Swiss company’s Chief Executive Officer Mick Davis on the combined board, according to people familiar with the talks, who asked not to be identified as the discussions are private. While Davis’s proposed departure no more than six months after the completion of the deal requires conditions and assurances to retain key managers, which could still potentially thwart the deal, both sides are committed to reaching an accord, the people said.

The talks, which were extended last week, may be one of the final stages in a seven-month effort by Glencore to seal what would rank as the largest takeover in the world this year. The friendly deal has almost been derailed by investor demands for improved terms and opposition to the 172.8 million pounds of proposed retention bonuses for 73 Xstrata executives. A dramatic 11th-hour move by Glencore on Sept. 7 to save the transaction saw the commodity trader raise its all-stock offer and propose its CEO Ivan Glasenberg eventually lead the enlarged company and not Davis as originally planned.

“Xstrata’s board will most likely recommend the sweetened offer as the management structure will broadly be unchanged,” said Myles Allsop, an analyst at UBS AG in London. The likelihood of the deal succeeding is greater than 60 percent, he said.

Colombian Mines

Xstrata is due to respond to Baar, Switzerland-based Glencore’s revised proposal by 7 a.m. London time on Oct. 1, after receiving a week’s extension.

Xstrata’s independent directors are still addressing shareholders’ concerns about the retention payments, the people said. The views of Xstrata shareholders on the issue are wide-ranging, with some opposing the measure while others say it’s necessary to ensure loyalty of the team that manages Xstrata’s mines, one of the people said. Spokesmen for Glencore and Xstrata declined to comment.

Glencore is seeking to create the world’s fourth-biggest mining company by combining with Xstrata, in which it has a 34 stake. Xstrata owns mines in Australia, South Africa and Colombia. It produced 72.4 million tons of coal used to generate electricity in 2011, according to data compiled by Bloomberg. Glencore has coal mines in Colombia and South Africa. It also trades the fuel and has an agreement to sell Xstrata’s coal exports.

CEO Switch

Glencore increased its takeover offer to 3.05 of its shares for each one in Xstrata on Sept. 7 after investors including Qatar Holding LLC, a sovereign wealth fund with a 12 percent stake in Xstrata, called for a higher bid.

The deal is structured as a so-called scheme of arrangement, the terms of which prevent Glencore from voting its Xstrata stake. That means investors holding as little as 16.5 percent of Xstrata can block the transaction.

Xstrata declined 0.2 percent to 957.50 pence at the close in London, while Glencore was little changed at 343.10 pence. That means Xstrata is trading at an 8.5 percent discount to the bid.

Glencore said Sept. 10 that Glasenberg, 55, would take the top job from Davis, 54, within six months of the deal’s completion. Davis was to have managed the combined company for about three years, according to the original offer announced Feb. 7.

Investor Criticism

Under the terms of the original takeover accord, the board of the combined company was to have included Davis, Glasenberg, and four non-executive directors from each company while Xstrata Chairman John Bond would take the same role. Bond will still be chairman, according to the revised takeover plan.

In May, Xstrata announced the proposed retention bonuses, which included 28.8 million pounds for Davis over three years. It said they were necessary to retain senior employees overseeing a multibillion-dollar expansion of production. The bonuses were criticized as excessive by some investors including Standard Life Investments Plc and Fidelity Worldwide Investment.

“We worry about the proposed loss of Xstrata’s management talent given the importance that the mining and energy business would have to the combined entity,” Paul Gait, an analyst at Sanford C. Bernstein & Co. in London, said in a note today.

There’s no disagreement between the two mining companies over the bonuses. Glencore said Sept. 10 that it was “content” with Xstrata’s request for its employees to get retention and incentive payments.

Executive Names

Some shareholders met with the company two weeks ago and asked Xstrata directors to name the executives who would receive the bonuses and justify the payment to each individual, according to one of the people familiar with the talks.

Davis won’t be entitled to receive his bonus under the new terms because he would leave before he qualifies for his pay. His contract entitles him to receive a termination fee of about $13 million when he steps down.

A successful acquisition by Glencore at current share prices would be the second-largest in the mining industry, behind Rio Tinto Group’s $38 billion purchase of Canada’s Alcan Inc. in 2007. The volume of announced takeovers of mining companies rose to $80.2 billion last year, the highest since 2008, 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.

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