Qatar Holding Backs Glencore/Xstrata Deal

on Nov 16, 2012

Qatar Holdings today announced today its support for the merger of Glencore (GLEN:LSE) and Xstrata (XTA:LSE), effectively giving the green light for the biggest deal in mining history to be finalised. With its 12 percent stake in Xstrata, the Middle Eastern funds have been the main reason for the prolonged negotiations over the deal and one of the fiercest opponents of Glencore’s initial offer of 2.8 new shares per one Xstrata share. But it now seems that Glencore’s amended offer of 3.05 shares per Xstrata share has finally brought an end to the ten-month stalemate, as Qatar Holding said it would vote in favour of two key resolutions on the takeover.

Other big shareholders such as Standard Life and Scottish Widows, which together own a 2.6 percent share, have also declared support for the merger, while Schroders and Knight Vinke will vote against the deal with their combined 1.5 share. At this point, the position of Norges Bank, owner of 4 percent of Xstrata, on the deal remains unclear, The Times says. The deciding vote is scheduled for Tuesday.

Despite the strong support declared for the deal, there are still a few potential pitfalls, such as the complex voting structure and the controversial retention plans for the Xstrata management, which could jeopardize the successful finalisation of the deal. It’s expected that the £144 million in bonuses proposed for Xstrata staff will cause an outcry amongst investors. The miner has claimed that these payment plans are vital for keeping its top management in place for at least three years. Qatar Holding declared it would abstain from voting on the matter.

The voting structure is also a subject of criticism for its complexity. The vote will be carried through in two phases: the first vote will determine whether investors prefer a deal with the bonuses or one without and will require the approval of 75 percent of the miner’s shares; then investors will vote the bonuses up or down in a poll that requires the approval of 50 percent of voters regardless of their stake size. The two votes must be in agreement for the deal to be finalised.

!m[](/uploads/story/830/thumbs/pic1_inline.png)These issues are particularly worrying for bankers working on the deal, who will lose $130 million in success fees should the merger fail. So, to ensure that the deal will go through on Tuesday, banks are making last minute attempts to rally more supporters, targeting various hedge funds controlling 5 to 6 percent of Xstrata shares through derivatives. The fact that these hedge funds don’t typically hold shares directly means they are often not eligible to vote, but bankers are trying to convince them to take up their shares and register for the vote.

Due to the way in which the second vote will be conducted, retail investors are also given a place in the spotlight. Despite their relatively low stake of less than 10 percent in Xstrata, they account for more than 30 percent of the miner’s voting investor base and will play a major role in the upcoming vote. Expectations are that most of them will vote, based on the recommendations of Xstrata’s board and will support the deal if the bonuses are approved.
The morning trade in London on November 15th saw Xstrata shares rising 0.6 percent to 925.9, whilst Glencore’s stock fell by 1.2 percent to 327.6.


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