Gencore Deal Hinges on Pay – by DAna Gimilluca (Wall Street Journal – September 27, 2012)

Could a proposed outlay of just $200 million really threaten a $70 billion deal? In the case of the proposed merger of natural-resource giants Glencore International GLEN.LN -0.03% PLC and Xstrata XTA.LN -0.22% PLC, the surprising answer appears to be yes.

The deal, which has faced numerous twists and turns since it was announced in February, is approaching another moment of truth. Xstrata’s board has until early Monday to decide whether to endorse a recently amended merger proposal from Glencore.

The decision is far from a simple one. While Xstrata’s board supports the tie-up in principle, it is caught between the disparate demands of its own shareholders on one side and Glencore’s negotiators on the other. If it can’t find common ground with both, it may be forced to withhold its support, which would likely doom the deal.

With its own shareholders, the thorniest issue involves roughly $200 million of planned payments to some 70 Xstrata managers over two years that are designed to ensure they don’t jump ship after the deal closes. That is a risk given that their current boss, Xstrata CEO Mick Davis, will be leaving if the merger goes through. Xstrata insists the payments are necessary to ensure the combined company runs smoothly, given that the Anglo-Swiss firm’s mining assets will account for about 80% of the enlarged organization’s profit. The payments are a bargain given what is at stake, they argue. A number of the company’s shareholders agree.

On the other side of that argument are other Xstrata shareholders led by BlackRock, the U.S. money-management giant that is the company’s third-largest shareholder, with a stake of more than 3%. Even though some fund managers at the firm like the deal, BlackRock is expected to vote against it as it currently stands because of its objections to the retention payments. The firm sees them as a form of excessive executive compensation, according to a person close to the deal. Also opposed to the retention payments is U.K. investment firm Legal & General, LGEN.LN 0.00% the fifth-largest Xstrata shareholder.

Underscoring the challenge Xstrata’s board faces in trying to steer the right course, UBS AG, UBS -2.24% another top 10 Xstrata shareholder, also opposes the deal, but for a different reason. It thinks the price is too low.

Some Xstrata shareholders are even said to object to merging with Switzerland-based Glencore in principle, believing Xstrata would be better off as a pure-play miner. Glencore is the world’s largest commodities-trading firm.

Combining the two companies would create an industry powerhouse with a market value of roughly $70 billion. Glencore, which has mining assets as well, already owns 34% of Xstrata. Buying the rest of the company at the price it is currently offering would cost about $35 billion.

The deal ran into real trouble in June, when Qatar Holding LLC, Xstrata’s second-biggest shareholder after Glencore, indicated it would vote against the proposal on its original terms, 2.8 Glencore shares for each Xstrata share. That forced Glencore to boost the price to 3.05 shares earlier this month.

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