Faced with a 'take it or leave it' offer from commodities trader Glencore, the independent directors of mining giant Xstrata have opted to recommend shareholders 'take it', paving the way for the creation of a combined entity market wits have dubbed 'Glenstrata'.
The decision was reached after much consultation with Xstrata's major investors, such that the original deadline for the decision was extended by a week.
The original plan for a "merger of equals" between Glencore and Xstrata ran into problems when disgruntled Xstrata shareholders decided that one merger partner was more equal than the other; the original terms of 2.8 Glencore shares for every Xstrata share were subsequently upped to a ratio of 3.05:1, and these are the terms to which the independent directors of Xstrata have given the thumbs up.
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The increase in Glencore's merger terms in early September was accompanied by changes in the proposed management structure of the combined entity in a move that was seen as a power-grab by Glencore's Chief Executive Officer (CEO) Ivan Glasenberg.
Way back in the mists of time, when the orginal merger was proposed, the plan had been for Xstrata's Mick Davis to be the CEO of the combined group with Glasenberg his deputy, but when Glencore first broached the idea of increasing its original offer, it proposed that Glasenberg be the CEO of the combined group. That put noses out of joint in the Xstrata board room and a compromise agreement has been agreed whereby Davis will be CEO of the combined group for six months before handing over the reins to Glasenberg.
At that point, Davis will be on his bike, with his seat on the board to be taken by a current Xstrata Group operational executive director, thereby maintaining Xstrata's majority of votes on the board.
The proposed merger is no longer dependent on shareholders voting in favour of revised incentive deals for management, though shareholders will get to vote at an extraordinary general meeting (EGM) on the revised incentive arrangements, after some of Xstrata's major investors grumbled at the generosity of the terms.
The Xstrata non-executive directors are advising Xstrata shareholders to vote in favour of the new deals because they believe there is a risk the bosses will quit their positions if the incentive arrangements are not revised, and the departure of key personnel would leave the combined group in a pickle on the operational front.
Mick Davis will no longer participate in the revised management incentive arrangements and will receive only his current contractual entitlement upon termination of his existing Xstrata service contract. The contracts of employment for all other members of Xstrata's management and Xstrata senior employees will be amended to reflect the fact that Mick Davis will cease to be CEO of the combined group and that this will no longer constitute an amendment to the agreed governance structure.
"My objective during my time as CEO of the combined group will be to preserve and enhance the value Xstrata's management team has created over the past ten years through a well-planned integration process and to lay down the foundations for the combined group's success over many decades to come," Davis said.
The pay deal and the merger proposal both require 75% or more by value and a majority of Xstrata shareholders by volume to vote in favour of the resolutions at the EGM.
"We have preserved the original board structure, including after Mick Davis's departure and the board has received satisfactory assurances on the governance, future strategy and management of the combined group," said Sir John Bond, Xstrata's non-executive Chairman.
"The independent Xstrata non-executive directors intend unanimously to recommend that eligible Xstrata shareholders vote in favour of the resolution to approve the revised management incentive arrangements and in favour of the merger but only if the revised management incentive arrangements are approved," Bond added.
"The amended proposed voting structure should allow Xstrata shareholders to fully express their own views on the proposed structure of the transaction," opined Glasenberg.
JH
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