Xstrata Plc will recommend shareholders vote in favor of a 20.5 billion-pound ($33 billion) takeover offer by Glencore International Plc after making changes to the terms to satisfy investors’ demands, according to a person familiar with the matter.
Xstrata, the largest exporter of coal used by power stations, will announce the proposal for what would be the year’s largest takeover at 7 a.m. today in London, according to the person, who asked not to be identified as the talks are private. The offer will alter the voting structure for key managerial pay packages, according to the person. Investors’s demands range from scrapping the bonuses to making them essential for the deal to proceed.
The recommendation will bring 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.
Glencore raised its offer to 3.05 of its shares for each one in Xstrata on Sept. 7. The increase from 2.8 came after investors said the original bid undervalued the Swiss mining company. The Baar, Switzerland-based commodities trader asked Xstrata to propose changes to the bonus package to ensure shareholder backing for the deal, which if it goes ahead will be the year’s biggest takeover.
“The deal has taken a long time, largely due to the differential in valuations on both sides,” Peter Rudd, resources and mining manager at Altitude Private Wealth in Melbourne, said by phone. A deal would put “them in a strong position in a number of sectors, such as nickel and copper, and on the commodity trading side.”
The retention payments total 144 million pounds, excluding the 28.8 million-pound bonus for Xstrata Chief Executive Officer Mick Davis, who will not qualify to receive it, according to the person close to the deal. Davis will receive a contractual termination fee of about $13 million when he leaves, the person said.
The person wouldn’t elaborate on the changes to the offer before an official announcement due today. The revised bid stipulates that Davis lead the merged company before handing over to Glencore counterpart Glasenberg within six months.
Spokesmen from Xstrata and Glencore declined to comment yesterday.
According to Glencore’s original bid on Feb. 7, Xstrata shareholders are required to cast their votes on the merger and on the corporate governance structure, which includes the retention bonuses. The merger plan requires 75 percent approval of the shareholders, while the retention package can be passed with 50 percent in favor. Both votes must pass for the deal to proceed, according to the original offer.
Investors, including Blackrock Inc., have asked the Xstrata directors to name the executives who would receive the bonuses and justify the payment to each individual, or make the vote unconditional for the deal, according to the person close to the deal and another person familiar with the talks, who also declined to be named. Some major shareholders are threatening to vote against the takeover if the vote to retain the key managers doesn’t remain conditional, they said.
Xstrata has also received assurances from Glencore that one of the miner’s executives will replace Davis on the combined board, the first person close to the deal said. Xstrata will hold six seats on the 11-member board.
The talks, which were extended last week, are one of the final stages in an almost eight-month effort by Glencore to seal the deal. Xstrata and Glencore will have to publish new merger circulars after today’s statement to reflect the changes and set new dates for shareholder votes, which could be in about a month’s time, according to the person.
The sweetened 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 with its 34 percent stake.
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.
Glencore’s move to buy Xstrata, first announced in February, hasn’t stopped the company from seeking other acquisitions, offering C$6.1 billion ($6.19 billion) for Canadian grain handler Viterra Inc. in March and increasing its stake in Kazakh zinc producer Kazzinc for $1.4 billion last month.
“They’re always open to investment opportunities and maybe at the bottom of the cycle they may do some acquisitions of assets to complement those that they will have in the combined group,” said Rudd.