Mining group Xstrata gave its long-awaited blessing on Monday to a revised $33 billion bid from trader Glencore, bowing to investor pressure by changing the deal to ensure a payment plan to keep its top managers does not sink the tie-up.
Xstrata dropped its insistence that the overall deal be tied to a shareholders' vote on the controversial package which offers over 70 top executives a total of roughly 140 million pounds ($226 million) to dissuade them from quitting.
Now investors will be able to vote against the retention plan without endangering the merger, bringing the deal closer to a conclusion almost eight months after it was first announced.
“I am glad that they have recommended the deal and also very pleased that they have unbundled the remuneration issue,” said one of Xstrata's 40 largest institutional investors.
“As much as I, personally, think that the two companies will be better off merged, it would have been hard to vote in favour of the retention packages.”
In the original all-share agreement, backed by Xstrata's board in February, shareholders had to back both the retention plan, then worth more than 170 million pounds, and the Glencore offer itself - or neither.
Xstrata argued its executives would be responsible for achieving the bulk of future profit. The board members later argued changes to Glencore's bid last month - which put the trader's own chief executive at the helm at the expense of Xstrata's veteran boss South African Mick Davis - made the plan even more necessary to avoid a drain of its top executives.
But after months of public and private grumbling from institutional shareholders like BlackRock, Legal & General and Schroders, Xstrata has agreed to split the issues.
Glencore, Xstrata's largest shareholder, was forced to raise its offer last month to 3.05 new shares for every Xstrata share it does not already hold, up from 2.8. This followed opposition from rival Xstrata investor Qatar, which threatened to sink the long-held plan to create a mining and trading powerhouse.
Glencore's conditions, however, included making its own boss and top shareholder, Ivan Glasenberg, as chief executive.
Xstrata's non-executive directors had been expected to support the higher, revised bid, having supported the original - but they said on Monday that their recommendation for the deal was conditional on the approval of the retention plan.
Without it, and given the imminent replacement of Davis, the deal could see Xstrata's team depleted at an important time for its development, they said.
“This view was reaffirmed by major shareholders, in particular in the light of the change of CEO and remains the rationale for retention arrangements,” Xstrata Chairman John Bond said.
“Nonetheless, some other shareholders remain opposed either to the principle of retention payments or to the originally proposed inter-conditional nature of the merger resolutions.”
Shares in both Glencore and Xstrata rose in morning trade, with Xstrata up 2.7 percent at 10:40 SA time at 983 pence, while Glencore was up 0.4 percent. The prices implied a ratio of almost 2.9 - closer to the revised ratio and up from 2.8 at Friday's close, meaning the market considers the deal more likely to happen as a result of Monday's changes.
“(To say it is) in the bag is probably too strong. The merger ratio is probably going to be found adequate to get the deal done,” Macquarie analyst Jeff Largey said.
“I think the new vote structure is unique, to say the least, and we'll see if, perhaps from a corporate governance point of view, this ruffles a few feathers.”
Xstrata added that Davis would be replaced on the board by an Xstrata executive when he leaves next year, retaining the current balance. Xstrata will have six out of 11 board members.
Glencore's Glasenberg, who is also Glencore's largest shareholder, has given an “irrevocable undertaking” that he will support the current structure for at least two years.
Xstrata said Davis, one of the best paid CEOs among FTSE 100 companies, had waived his right to his 2012 retention award but would receive 9.6 million pounds on terminating his contract - equivalent to annual salary, 2011 bonus and other benefits. - Reuters