By Alex MacDonald
PARIS--U.K. investment fund Scottish Widows Investment
Partnership became the latest Xstrata shareholder to back the
multi-billion dollar all-share merger between Glencore
International PLC (GLEN.LN) and Anglo-Swiss miner Xstrata PLC
(XTA.LN) as it heads toward a vote Nov. 20.
Scottish Widows joins a chorus of other shareholders and
advisory groups that have recently announced their intention to
back the deal. Xstrata' seventh largest shareholder, Standard Life
Investments Ltd. said in September it was supportive of Glencore's
revised offer of 3.05 shares for every Xstrata share while
independent advisory groups Institutional Shareholder Services and
Glass, Lewis & Co LLC issued reports last week in which they
recommended shareholders vote in favor of the deal but against
retention packages slated for Xstrata's top managers.
Still other large shareholders such as Knight Vinke and Schroder
Investment Management Ltd. remain opposed to the deal.
Anne Fraser, Head of Corporate Governance at Scottish Widows
said in an emailed statement Friday "We are supportive of the
merger and the revised incentive arrangements."
She added the merger will bring together two different but
complementary businesses and "In this particular case it's our view
that it will be important to retain the skills required to manage
the combined assets and deliver the promised cost savings."
Scottish Widows owns a 1.14% stake in Xstrata, making it
Xstrata's ninth largest shareholder, according to FactSet.
Glencore and Xstrata are seeking shareholder and regulatory
approval for a merger to create the world's fourth largest
diversified mining company, with a market capitalization of about
$70 billion. The deal has faced many twists and turns since it was
first announced in February, not least shareholder opposition to
what some considered to be excessive retention packages that lacked
performance targets.
Xstrata revised the retention packages of about $200 million for
some 70 Xstrata managers by making it all based on shares and
linking it to cost savings for some senior executives. It also
decoupled the retention package vote from the merger vote so as to
give shareholders the ability to vote on the deal as they wished.
Some shareholders such as BlackRock Inc. (BLK ) were previously
against retention packages in principle.
Under the new voting structure. Xstrata shareholders will be
asked to vote on two resolutions: one approving the deal on the
condition that the retention payments are included, and the other
approving the deal on the condition that they aren't. Shareholders
will then vote on the retention plan. Depending on the outcome of
that vote, one of the first two resolutions would be discarded and
the prior vote on the other would determine the deal's fate. The
deal has an approval threshold of 75% of Xstrata's shares while the
bar for the retention payments is 50%. Glencore isn't allowed to
vote its 34% stake in Xstrata. The way the deal was constructed
before, there were simply two votes, one on the deal and the other
on the pay plan. Shareholders had to approve both for the deal to
go forward. Xstrata's board has recommended that shareholders vote
in favor of the resolution that includes retention and against the
one that doesn't. It also recommended that shareholders vote for
the retention package.
ISS and Glass Lewis said even though they are both against the
retention packages, the deal has a better chance of being approved
if both of the first two resolutions were approved.
"Absent such a consideration, it is mathematically possible that
a majority of shares sufficient for approval do vote in support of
the transaction--but the transaction still fails, because the votes
are divided between two mutually exclusive proposals for the
merger," ISS said in its report.
ISS noted it considered the retention packages unnecessary given
attractive executive remuneration packages in the new combined
company, while Glass Lewis said it questioned the effectiveness of
the retention packages without additional performance related
targets.
Analysts at Liberum Capital ascribed an 80% chance that the deal
would be approved last week. Glencore and Xstrata are still waiting
for anti-trust approvals from the European Commission and
China.
As of the end of Friday, the relative value of Glencore shares
to Xstrata shares was 2.86 Glencore shares for every Xstrata share,
an indication that the deal was likely to close compared to the
revised share swap ratio offer of 3.05, according to arbitrage
hedge funds and analysts.
Glencore revised its offer last month from an original 2.8 in
order to salvage the deal from collapse after Xstrata's second
largest shareholder, sovereign wealth fund Qatar Holding LLC, said
it would vote against the offer based on its original terms. Qatar
Holding, with a 12% stake has the power to block the deal on its
own given that Glencore isn't allowed to vote its Xstrata shares
and given expected absentee levels.
Qatar hasn't yet made its view public about the deal although
analysts and large shareholders believe it is supportive of the
revised offer.
-Dana Cimilluca in London contributed to this article
Write to Alex MacDonald at alex.macdonald@dowjones.com