October 2, 2012

In order to keep the deal from foundering on differences over executive pay, Xstrata PLC unveiled a new structure for the company's proposed US$70 billion merger with Glencore International PLC.

Xstrata's board, facing a deadline to endorse or reject its proposed merger deal with Glencore, formally recommended it to shareholders, WSJ's Dana Cimilluca reports.

Xstrata's board, facing a Monday (Oct 1) deadline to decide on the deal, recommended that shareholders approve it. Its new process for shareholder approval is meant to navigate controversy over roughly US$200 million in retention payments designed to keep about 70 Xstrata managers from leaving the combined company. Under the old structure, the deal could go forward only if the payments were approved. Now, it can pass without them.

But some big Xstrata shareholders, such as Qatar Holding LLC, have indicated they would support the deal only if the payments were included. Xstrata's business is expected to account for more than 80% of the combined company's profit, which the board has cited as a reason why retaining its key executives is important.

In a sign that the market was betting that the deal's architects had managed to come up with a workable solution to the conflict they faced, the ratio of Xstrata's share price to Glencore's rose to 2.87 on Monday in London, up from 2.79 Friday and closer to the deal price of 3.05 Glencore shares for each Xstrata share. Xstrata's shares rose 2.4% to close at GBP9.80 ($15.84), while Glencore's shares fell 0.3% to GBP3.42 pence (US$5.53).

At current share prices, the two companies would have a combined market value of nearly US$70 billion. Buying the portion of Xstrata that it doesn't already own would cost Switzerland's Glencore, the world's largest commodities trader, nearly US$35 billion.

The deal has an approval threshold of 75% of Xstrata's shares while the bar for the retention payments is 50%. Since Glencore can't vote its 34% stake in Xstrata, and taking into consideration the expected turnout, people close to the deal estimated that "No" votes from just 12% of Xstrata shares would be enough to kill the merger.

The deal, which would create a mining and commodity-trading powerhouse unique in the industry, has hit numerous twists and turns since it was first announced in February. Glencore was forced last month to boost the price of the all-stock deal to 3.05 of its shares from 2.8. Since then, the onus has been on Xstrata to find a solution to the pay quandary. While the new arrangement is expected to put the deal on sounder footing, there is still no guarantee that shareholders ultimately will bless the merger or that the new voting plan won't somehow backfire.

Another aspect of the deal that has changed since Xstrata's board originally endorsed it involved the governance of the combined company. Glencore recently insisted that its chief executive, Ivan Glasenberg, become CEO of the combined company after a six-month interim CEO stint by Xstrata CEO Mick Davis. The earlier plan had called for Davis to be CEO for at least a few years.

The shareholder votes are expected to take place around the end of this month. The companies said they expect to get regulatory approval from China, South Africa and the European Commission by year-end. Xstrata and Glencore didn't revise their earlier estimate that the deal would close this quarter.