Xstrata gives shareholders freedom – but not enough information – to choose

2 Oct

If in doubt, let the shareholders decide. It’s rarely a bad principle and it’s no surprise that Xstrata’s board, after numerous cock-ups, has sought sanctuary in it. Xstrata investors can now vote to have their company combine with Glencore only if a £140m retention package for 70 executives is approved, which is what the board recommends. Or they can have the merger-cum-takeover without the lavish handouts. Or they can shoot down the deal altogether.

Everybody happy? No. Giving shareholders more freedom to choose is clearly sensible. But investors also require useful information so that they can make a proper appraisal of risk and rewards. That’s where the Xstrata chairman, Sir John Bond, and his colleagues have fallen short. Monday’s document, like the last, is seriously deficient in two important areas.

Look, for example, at the board’s stance on option two – that of approving the deal but blocking the retention package. In effect, the directors are saying to the shareholders: “On your heads be it.” Their reasoning is that “the value proposition of the combined entity” would be “at risk” without the retention package.

Come on, you can do better than that. Why do the retention sums have to be so large? What is the best estimate of how many executives would quit if deprived of their golden carrots? And why couldn’t adequate replacements be found within Xstrata’s own ranks? The 58-page document glosses over such detailed questions, expecting shareholders not to want to look further than the “at risk” line. Not good enough.

There is also a gross lack of information over strategy. Anybody who has followed this saga over the past nine months knows that the two companies have different views on how to allocate capital in mining. The Glencore thesis is that the best returns come from extending so-called brownfield sites and that the political risk that goes with investing in places like the Democratic Republic of Congo is tolerable. The Xstrata approach, as evidenced in its heavy capital spending in recent years, prefers greenfield expansion, with a strong inclination towards “safe” countries. Is there real tension there, as opposed to the superficial squabbling that goes on during deal negotiations? If so, how will it be resolved?

The short answer, it seems, is that fans of Xstrata’s strategy are meant to be happy that their company will have a majority of one on the combined board, even if Glencore’s Ivan Glasenberg will be chief executive after six months. But this governance arrangement will last two years. For investors who own Xstrata shares because they have a bullish 10-year view of the commodities cycle, two years is no time at all. They are being asked to accept Glencore paper with very little idea of how the new board, which is likely to come to be dominated by Glencore from the third year, will conduct investment.

All in all, Iain Richards of Threadneedle has the clearest view of this unappetising transaction: “The process through which this deal emerged and has been overseen has been deeply disappointing. The apparent target fixation on doing a deal has, to our minds, been at the expense of proper consideration being given to the quality and value embedded in Xstrata and its good prospects as a stand-alone business. The extraordinary executive payments envisaged by the board, firmly incentivising the deal, have done nothing but exacerbate that perception and the related concerns that exist.”

Yes, that’s the measure of it. Of course, the deal is almost certain to happen because Qatar Holdings, with 12% of Xstrata, seems now to be in favour. But the creation of Glenstrata will surely come to be seen as a depressing low point in City dealmaking. Yes, life is tricky when you have a 34% shareholder – but not half as tricky as Xstrata’s board has made it look.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: