If nothing else, the executives at Xstrata, the Swiss mining giant, get marks for being clever.
On Thursday, the company set Nov. 20 as the date for a shareholder vote on its megamerger with trading behemoth Glencore. The vote has been structured in a way to maximize efficiency in the hope that $200 million in management retention payments are also approved. It's just part of the machinations intended to influence the voting on the largest deal of the year.
Xstrata shareholders initially objected to the low premium being offered by Glencore, which also owns 34 percent of Xstrata. On Sept. 7, Glencore, about to lose an Xstrata shareholder vote on the deal, raised the ratio it was willing to pay from 2.8 shares Glencore shares per Xstrata share to 3.05 Glencore shares. That valued the combined company at about $90 billion.
Some shareholders, led by Knight Vinke Asset Management and Threadneedle Investments are still objecting. In a letter to The Financi al Times on Sept. 14, Knight Vinke's head, Eric Vinke, wrote “we have been disappointed at the lack of robust independence exhibited by the board in the context of Glencore's hostile takeover bid.†For the understated English, words like “disappointed†are practically extreme rhetoric.
But Xstrata's board is not only coming under fire for selling to Glencore on the cheap. It is also being criticized for initially planning to pay large retention bonuses in the amount of $275 million to management.
In the newest iteration, Xstrata has reduced the aggregate by $75 million, primarily because Xstrata's chief executive, Nick Davis, will no longer head the combined group. Still, pay is a touchy topic in Britain these days and shareholders like the American asset manager BlackRock reportedly remain dissatisfied that the payment is not only too big, but misdirected. Xstrata has stated it needs to pay this amount to retain its mining experts, but about 15 of th e intended 72 recipients are central administration professionals, according to reports.
It is here where the voting games begin.
The initial deal required that the merger and retention package be approved together. But in a clever move bound to have its shareholders' heads spinning, Xstrata claims it has decoupled the two issues by separating out the vote.
The first question is a vote to approve or disapprove the retention pay package. The second, however, is in two parts. Shareholders are being asked to vote to:
Part I: Approve the merger and accept the compensation package.
Part II: approve the merger and reject the compensation package
Shareholders can vote yes or no on the first question and also yes or no for both parts of the second question. Critically, Xstrata is letting shareholders vote yes to both parts of question two.
This is important because if the first question (whether to approve the compensation package) is approved, then any votes made to approve the merger and reject the compensation package are disregarded and only votes to approve the merger and accept the compensation package are counted. If the first question is disapproved, then any votes made to approve the merger and accept the compensation package are disregarded and only votes to approve the merger and disapprove the compensation package are counted.
According to Xstrata, “this voting structure provides eligible Xstrata shareholders with the ability to vote against the resolution to approve the revised management incentive arrangements in the knowledge that a vote against the revised management incentive arrangements is not necessarily a vote against the merger.â€
Really?
The problem is that if you want the merger to go through but don't want the incentive package, you are faced with a quandary. If the retention package is approved and you vote no on the merger and retention package, your vote won't count toward the 75 percent of shares needed to approve the merger.
The result may be that a merger you want does not happen because the necessary vote cannot be achieved.
This is a diabolical game of the prisoner's dilemma. As Institutional Shareholder Services wrote in a note to its clients this week, the only viable strategy if you want the merger to succeed is to vote yes for both parts of question two. Otherwise, you could be left with no merger and no compensation package. But such a vote almost ensures the passage of the retention package with the merger.
Xstrata claims that it has decoupled the vote on the merger from the compensation decision, but when you really look at it, the company appears to have just rejiggered it to push shareholders into accepting the package.
It may backfire on the company, however, if shareholders really do find the payments so objectionable they vote against their economic interests to have the merger ap proved. This is yet another test of attitudes on compensation in Britain.
Even without this gamesmanship, Xstrata faces an uphill battle. To win, Xstrata must have the deal approved by 75 percent of the shares not held by Glencore.
This effectively means that holders of 16.5 percent of Xstrata's shares can block the deal, itself an opening for more maneuvering. And here, the government of Qatar with 12 percent of Xstrata's shares becomes the real player. It will determine whether this deal goes through.
Those in favor of the deal cheered when Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani of Qatar, stated cryptically that “We're looking in favor of doing something between the two companies,†taking this for a sign of support. But still there is no express statement and previously Qatar had said it would back an offer at a ratio of 3.25 Glencore shares.
The real question is whether Xstrata can be sold to anyone else and if so, wheth er Glencore is underpaying. Xstrata is important to Glencore for its cash flow but other huge mining conglomerates may also be interested. Vale, the Brazilian mining company, reportedly had discussions to buy Xstrata in 2008. Whether Vale would be willing to bid again is unknown, as is whether there is anyone out there who can compete to buy Xstrata or whether it is more valuable for Xstrata to stay independent. But with Glencore the only deal on the table Xstrata seems to be willing to pursue, these are questions left unanswered.
Instead, as this deal heads to another vote, it is stuck in the land of voting gamesmanship.
