As Time Wanes, Glencore-Xstrata Deal Hinges on Leadership
The $90 billion merger of Glencore and Xstrata is on shaky ground as the two sides struggle to come to terms over the makeup of the combined management team.
Negotiating time is growing short. After getting an extension on the initial deadline, Xstrata has until Monday to decide whether to accept Glencore’s sweetened bid.
With large shareholders threatening to block the deal, Glencore increased its offer this month, proposing to exchange 3.05 of its shares for every Xstrata share. When the merger was announced in February, Glencore laid out a ratio of 2.8 to 1.
When it raised its bid, Glencore also altered the proposed new executive suite. Rather than hand over the reins of the combined entity to Xstrata executives, Glencore wants more control over management.
Under the new terms, Glencore’s chief executive, Ivan Glasenberg, will take over from Mick Davis, now Xstrata’s chief executive, six months after the merger is complete. The original deal called for the Xstrata executives Mr. Davis; John Bond, chairman; and Trevor Reid, chief financial officer, to hold the same positions at the new company.
This is where the tensions lie.
The issue of Glencore-Xstrata’s management is about more than corporate pride and the egos of its chief executives. It is also about business expertise.
Xstrata is a powerhouse in mining, with large positions in copper, coal and zinc production. While Glencore has some mining operations, its main focus is trading. Glencore has unrivaled intelligence on the global supply and demand of materials like wheat, oil and copper.
Those are fundamentally different businesses. Mining investments are long term, often taking a decade or more to generate a return. Trading relies on quick returns based on rapid, sometimes minute-by-minute decisions.
The mining business would dominate the new company, accounting for 84 percent of operating profits based on 2011 earnings. But Glencore’s executives, who are now positioned to take over, are all commodities traders.
Since the beginning, Xstrata has emphasized the importance of management, particularly its own executives.
In May, the miner’s independent directors noted that “the new business model resulting from the merger, and its ability to generate superior shareholder returns, is dependent on the retention of key Xstrata personnel.” They reiterated the stance a few months later, saying that “retaining Xstrata’s proven management team is essential for the success of the merger.”
The worry for Xstrata shareholders is that all the top mining executives may resign when Mr. Davis steps down. He has been the only boss since the company went public in 2002. He also runs Xstrata with a distinct management style that grants divisional chiefs day-to-day autonomy.
An adviser close to Xstrata said he had the “strongest possible guidance” that Xstrata executives would leave when Mr. Glasenberg took over. As a result, retention packages have become the leading issue in Xstrata’s talks with shareholders before its decision to recommend or reject Glencore’s offer, according to an adviser close to the proceedings.
More than 60 Xstrata executives would receive bonuses worth more than $200 million if they stayed at the new company for a specified period. Xstrata says it believes these are crucial safeguards for the performance of Glencore-Xstrata’s mining-led business.
But it may be tough to extract any richer bonuses than those.
In Britain, where both companies trade on the public markets, institutional investors have rebelled against outsize compensation this year. Xstrata adjusted its retention packages in August after institutional shareholders complained. While the company retained the value of the awards, they are now linked more to performance targets.
In the end, the deal will come down to Xstrata investors, who may want different things. Some are pushing for tamer pay packages. Others want seasoned miners to lead the company — not least because the executives have made the shareholders a lot of money. Since the company went public in 2002, Xstrata’s shares have more than doubled.
Qatar Holding, the sovereign wealth fund of the Persian Gulf nation, will be an important factor. The gas-rich country has spent over $5 billion this year accumulating a 12 percent stake in the miner. That makes Qatar the second-largest shareholder in Xstrata behind Glencore. Qatar’s objections over the first deal prompted Glencore to raise its offer.
The country is not concerned about the size of Xstrata executives’ pay packages, according to an adviser to Xstrata. Rather, Qatar’s priority, the person added, is to retain Xstrata executives. Qatar backs Xstrata’s management, as well as the company’s prospects as a stand-alone company, an adviser to Qatar said early in September, adding that it would not hesitate to block a deal that it saw as unfavorable.
So far, Qatar has remained silent on Glencore’s latest proposal, waiting to comment until Xstrata makes its decision.