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Glencore’s Revised Xstrata Offer Divides Investor Groups

Nov. 7 (Bloomberg) -- Glencore International Plc’s revised $33 billion takeover offer for Xstrata Plc has divided shareholder advisory groups in the run-up to this month’s vote.

Pensions & Investment Research Consultants Ltd. today recommended shareholders oppose the deal because of a lack of due diligence and board independence. While Institutional Shareholder Services Inc. and Glass Lewis encouraged investors to support for the takeover, they called for the resolution on retention bonuses to be voted down.

Investors are due to vote Nov. 20 on plans to create the world’s fourth-largest mining company. Glencore, the largest publicly traded commodities supplier, is seeking to take over Zug, Switzerland-based Xstrata’s copper, coal and zinc mines to create the fourth-biggest mining company and challenge rivals BHP Billiton Plc, Vale SA and Rio Tinto Plc.

Shareholders will be asked to consider two resolutions -- one to approve the takeover along with 144 million pounds of retention bonuses for about 70 Xstrata employees, and a second that excludes the pay question. The merger must be backed by a vote of 75 percent to be approved.

“Given the complexity of the Glencore business, PIRC would have liked to have seen evidence of more extensive due diligence,” said the adviser, which advises institutional investors with combined assets exceeding 1.5 trillion pounds ($2.4 trillion). “Additionally, the level of independent representation on the board is insufficient.”

Independent Directors

As measured by PIRC guidelines, only three members of Xstrata’s 13-strong board are independent directors, excluding Chairman John Bond, said the London-based group.

Xstrata said seven of its 13 directors are independent based on the U.K. corporate governance code. The independent directors conducted due diligence on Glencore’s industrial and marketing businesses, Xstrata said in March. Glencore declined to comment.

ISS recommended shareholders vote for both resolutions approving the deal with and without the retention package. Investors should then oppose the bonus deal package in the following standalone vote because the proposals include substantial share awards, it said in a Nov. 2 report.

“The 22 percent premium implied by Glencore’s revised offer appears reasonable in the circumstances, taking into account the size of Glencore’s current stake in Xstrata,” ISS said. “The strategic rationale offers some net upside to Xstrata, and the simplification of the shareholder structure is a compelling point.”

Revised Bid

Glencore Chief Executive Officer Ivan Glasenberg increased the bid on Sept. 7 to 3.05 of his company’s shares for each one in Xstrata from 2.8 shares offered in February. That followed demands from investors including 12 percent shareholder Qatar Holding LLC for a higher offer.

The Association of British Insurers lowered its concern rating for the deal to amber from the “red top” it gave it in June that highlighted a breach of best practices.

“While the proposed merger is no longer conditional upon the approval of the management incentive arrangements, holders will note that the independent Xstrata directors recommend to vote in favour of the resolution which makes the merger conditional upon the approval of the management incentive arrangements,” ABI said in an Oct. 31 report.

Xstrata’s board on Oct. 1 recommended shareholders back the revised deal and vote for the retention packages to retain the managers responsible for the industrial assets that will account for about 80 percent of the combined company’s earnings.

Six Months

Mick Davis will serve as CEO of the combined group for six months, according to the revised offer, as opposed to about three years in the original February offer, before handing the post over to Glasenberg. Davis won’t receive the 28.8 million-pound retention bonus he was offered in the initial bid.

As few as 16.48 percent of shareholders can block the deal because U.K. takeover rules prevent Baar, Switzerland-based Glencore from voting its 34 percent stake in Xstrata, the world’s largest thermal coal exporter.

Xstrata dropped 2 percent to 975.80 pence at the close in London. Glencore also fell 2 percent to 340.35 pence.

“There is also concern over a possible executive-influence on the decision, due to the rather lucrative package involved should the deal be approved and realized,” PIRC said. “Because of these reasons and the uncertainty of good control and protection for shareholders of non-U.K.-registered company, PIRC is recommending an oppose vote.”

PIRC said it welcomed the change to the voting that allows shareholders to vote for the merger without supporting the payment packages.

To contact the reporter on this story: Firat Kayakiran in London at

To contact the editor responsible for this story: John Viljoen at

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