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EUROPEAN BUSINESS NEWS

Complex Voting Puts Glencore-Xstrata Merger at Risk

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By DANA CIMILLUCA
Updated Nov. 12, 2012 12:01 a.m. ET

LONDON Xstrata PLC's effort to seal a merger with Glencore International PLC has
run into several unexpected obstacles since it was unveiled nine months ago.
Now another hurdle is looming that could prove fatal.
Timeline: Barreling Toward a Deal

Shareholders next week will vote on the

merger using an untested ballot system
devised to sidestep investor opposition to
retention payments that Xstrata has
proposed.

As next Tuesday's vote approaches,

people on both sides of the deal have
expressed confidence that the merger
will be approved. But behind the scenes,
View Graphics
they are fretting that the complex voting
procedure contains land mines that could blow up the deal even though most
shareholders seem to be in favor of it.
The proposed merger would create a natural-resource company with a market value
currently measured at $68 billion. It has traveled a rocky path since it was first
proposed in February. Glencore originally proposed to pay 2.8 of its shares for each
Xstrata share in a deal that would have awarded several senior Xstrata executives,
including Chief Executive Mick Davis, millions of dollars for staying with the combined
company for three years. That proposal called for Xstrata shareholders separately to
approve the price and the retention payments.
When it became clear that both measures would be defeated, the two Anglo-Swiss
companies set about restructuring the deal.
First, Glencore agreed to raise the price to 3.05 of its shares. In exchange Glencore
demanded that its CEO, Ivan Glasenberg, get that post at the combined company
instead of Mr. Davis. With Mr. Davis now expected to leave after six months, he has
been eliminated from the retention pool, putting its size at around 140 million, or
roughly $220 million.
Glencore's new plan left Xstrata to address the other threat to the deal: the retention
payments, which many U.K. shareholders said was a form of excessive executive
compensation.
The solution Xstrata developed is a three-step voting proces that lets the deal go
through without the retention payments. Xstrata shareholders will be asked to cast

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three votes: first, on a deal that includes the retention payments; second, on one that
doesn't; and third, on the retention payments themselves.
For the deal to pass, there has to be harmony between one of the first two votes and
the third. If, for example, only the first resolution passes (approval with retention
payments), then the retention payments also must pass for the deal to go through.
Adding to the difficulty is that the first two votes are subject to approval by 75% of the
Xstrata shares that Glencore doesn't already own. The threshold on the third
resolution is 50%. Glencore already holds a 34% stake in Xstrata.
Much of the nervousness of those involved with the deal centers on a scenario in
which the first resolution passes, and the second and the third are rejected, which
would kill the deal.

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Several factors make that a plausible scenario.

Xstrata's board is recommending that shareholders vote "yes" on the first resolution,
"no" on the second and "yes" on the retention payments. The board has said the
retention payments are essential to the deal's long-term success since Xstrata's
mining assets would account for the overwhelming majority of the combined
company's earnings.

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Qatar Holding LLC, Xstrata's second-largest shareholder, after Glencore, indicated

that it would take its cue from Xstrata's board but hasn't been explicit about how it
would vote. The sovereign-wealth fund owns about 12% of Xstrata and had agitated
successfully for a higher price.
But other shareholders are expected to vote against the third measure. Many of them
favor a deal but disapprove of the retention payments.
BlackRock Inc., which holds nearly a 3% stake in Xstrata, is expected to vote "no" on
the third measure. While fund managers at the firm support the deal, it was unclear
how BlackRock would vote on the first two resolutions.
Other shareholders could be swayed to vote like BlackRock on the payments.
Advisory firm Institutional Shareholder Services has recommended that shareholders
vote against the third measure even as it recommended voting for the first two.
Glencore markets and distributes a range of commodities, while Xstrata mines coal,
zinc and other products. Putting the two companies together would create a vertically
integrated powerhouse in the industry. Acquiring the Xstrata shares that Glencore
doesn't already own would cost roughly 20.5 billion based on today's share price.
One thing that deal proponents have going for them is that investors who attend
shareholder gatherings in London or Zug, Switzerland, will be able to change their
votes on the pay plan after seeing the results of the first two votes.
Alex MacDonald in London contributed to this article.
Write to Dana Cimilluca at dana.cimilluca@wsj.com
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