Xstrata 1049p (-13.5p)
Glencore 368.15p (-5.15p)
Our view Avoid
Bad news for savers if, like me, you have money squirrelled away in an tracker fund that follows a UK stock market index. You will most likely have some exposure to both Xstrata and Glencore.
I find that rather galling having watched the shenanigans that have been going on over the off-again, on-again merger of the two.
First of all they put together a merger of equals that looked like a winner – that is, if you happened to be an executive at Xstrata, and particularly its chief executive, Mick Davis. Xstrata bosses stood to net £240m between them. Mr Davis was going to get £30m for nothing other than staying at his desk for the three years, plus up to £30m more from other share and bonus schemes.
Is it any wonder that Mr Davis, who was also going to be the boss of the combined operation, was in favour of the deal?
The trouble is, as many shareholders pointed out, the deal under-valued Xstrata and its prospects. Xstrata's owners felt they were handing the company to Glencore, which they felt would be the controlling party, despite Mr Davis' position, on the cheap.
What was really galling was that the non-executive directors of Xstrata, supposed to represent their interests, waved it through. And backed that unconscionable retention package, which would have been paid even if the combined company lost 90 per cent of its value on Mr Davis' watch.
Xstrata's chairman, Sir John Bond, who had been lined up to lead the board of the merged company, told Xstrata shareholders that a merged company producing superior returns was "dependent upon the retention of key Xstrata personnel".
What he didn't explain in his letter was why it wasn't necessary to link their pay to those returns.
It is issues like this that make effective corporate governance so important, and the reason that it demands attention.
With an EGM approaching Glencore blinked, changed the terms to structure the deal as a takeover, and sweetened them. It was also decided that Ivan Glassenberg, its founder, would be the top dog, and Mr Davis would leave, albeit with £30m or so in his back pocket.
This matters to investors in trackers because we will be stuck with the merged company, or the two component parts if it fails, because both hold places in the FTSE 100 and FTSE All Share indices.
You might say, stop whingeing, that's exactly what you get for investing in a tracker. You want to pick and choose? Pay up for an actively managed fund, or do it yourself and put your own portfolio together.
And that is indeed true. But when I invested, I wanted a UK stock market tracker that invested in British companies. Glencore has almost no operations in this country. It has a small corporate office here, but it is run out of Switzerland to take advantage of the tax regime. Ditto Xstrata. It is only in the FTSE 100 and the FTSE All Share because its shares' primary listings are here.
Ryanair once argued, with some force, that it should be allowed a place in the FTSE 100. It is headquartered in Dublin (which also has favourable tax rates) but the company is listed in London and has very substantial operations in this country. Ah, but its primary listing is in Dublin. That's what rules Ryanair out, and lets both Glencore and Xstrata in, even though they are no more British than the rambunctious low-cost airline.
There are numerous similar natural resources companies – ENRC and Kazakhmys spring to mind – but there are plenty of others lower down the scale, with similar issues and plenty of problems on the governance front.
Is it feasible to create a fund that has the low costs of a tracker but allows investors to duck companies like this which have serious governance concerns and are about as British as Swiss cuckoo clocks? I don't know. Perhaps an enterprising fund manager with an eye for good governance (Legal & General?) might be prepared to give it a go.
In the meantime, I put an Avoid rating on both Glencore and Xstrata, for one simple reason: investors can't be entirely sure whether the companies are being run in their interests. They'll just have to hope that there'll be something left for them after the bosses have had their fill of the cream. That's not good enough for me.