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Qatari threat to £57bn merger of Xstrata and Glencore

Anger continues over £170m retention bonuses for executives at mining giant
  • @BawdenTom

Qatar threatened to scupper the proposed £57bn mega-merger between the mining and commodity giants Glencore and Xstrata last night unless the terms of the deal were improved for shareholders.

The Arab emirate's sovereign wealth fund, which is the second-largest shareholder in Xstrata after Glencore, unexpectedly said that "whilst it sees merit in the a combination of the two companies, it is seeking improved merger terms".

Glencore is currently offering 2.8 of its shares for each Xstrata share, but the Qataris said 3.25 Glencore shares per Xstrata share would be "more appropriate".

Shareholders will get to vote on the merger on 12 July. However, opposition from just 25 per cent of investors will be enough to halt the deal, since it has been set up as a scheme of arrangement, requiring the backing of three-quarters of the investors.

This means Qatar's 11 per cent stake could provide decisive to the merger actually happening. Because Glencore already owns 34 per cent of Xstrata and will be unable to vote on its holding, only 16.4 per cent of Xstrata's shareholders need to vote against the deal to block it.

The sovereign wealth fund's opposition came as the two companies were preparing to bow to investor pressure over controversial plans to pay key executives £170m just to keep them at the combined business if the deal goes through.

The companies have come under increasing pressure to rethink the retention packages from investors such as Standard Life and Fidelity, as well as the Association of British Insurers, the shareholder advisory group whose members own about 17 per cent of the UK stock market.

Xstrata and Glencore have made the merger contingent upon these so-called retention packages, which would pay Xstrata's chief executive, Mick Davis, £29m for running the group for three years after the merger is finalised, irrespective of the new comnpany's performance.

Although they are expected to stop short of scrapping the payments, the companies are discussing a range of options to appease shareholders. Under the most likely scenario, they would link the payments to performance in some way. However, no final decision had been made last night and it was still possible the companies could decide against making any changes.

On Monday, Standard Life's head of UK equities, David Cumming, turned up the pressure when he said shareholder hostility to the payments meant the merger was now "in jeopardy" and could mean that Mr Davis would have to step down.

"The problem is anyone voting in favour of this plan is voting to kill the 'Shareholder Spring' stone dead and, to be honest, will destroy any credibility they have in the governance arena, so I don't think there's going to be any more supporters. On that basis the deal is in jeopardy," Mr Cumming told the BBC.

"I think to preserve the integrity of the board … they're almost going to have to hand over to Glencore, make it a takeover rather than a merger, and that might involve Mick Davis actually standing down," Mr Cumming added.

Xstrata and Glencore declined to comment last night.