As Hercules found, there wasn’t much point cutting the head off the Lernaean Hydra because two more would grow back in its place.
Mick Davies must be feeling similar this weekend as the deal to bring together Xstrata (Other OTC: XSRAF.PK - news) and Glencore limps towards the finish line. It has taken Mr Davies, the Xstrata CEO, an age to find the requisite golden sword to cut through his enemies. He still may not have done enough.
Xstrata shareholders vote next week on a merger of two of the world’s biggest companies, silverback organisations bestriding massive globalisation plays on the mining and trade flows of everything from iron to coal and zinc to oil. Almost everything we consume will have had the hand of one them involved at some point in the process of production.
800lb Gorilla Number One is Xstrata, a mining conglomerate with a market capitalisation of close on £30bn. 800lb Gorilla Number Two is Glencore, a commodities trading house with mining production attached, whose directors, including the chief executive Ivan Glasenberg, have built a powerhouse company and have been well rewarded for it.
If Mr Glasenberg ever met Croesus, the South African I am sure would pick up the tab.
It is worth going back to basics on the rationale for the deal which has received brickbats and bouquets in equal measure. When Glencore, which has a 34pc stake in Xstrata, listed on the London stock exchange (LSE: LSE.L - news) in May 2011, Mr Davis knew he had a problem. Although Glencore is in the main a trading house it has significant mining interests.
Every time Xstrata eyed a strategic investment, Mr Davies knew, Glencore would be there with bigger muscles and greater access to capital. With a competitor owning such a large stake, Xstrata’s share price was running at a permanent discount. And as a shareholder, Glencore had a deep understanding of Xstrata’s businesses and access to real-time information about its operations, some of which it considered sub-optimal. One gorilla will always find it hard to sleep with another gorilla sitting on the edge of the bed cracking its knuckles.
So Mr Davies sued for peace, betting that a merger with Glencore would be better than the uncomfortable status quo. As the South African likes to argue, the world is not about creating what is perfect, it is about living in the “universe of the possible”.
It was now a question of taking the deal to investors. With their combined balance sheets, the two companies could take on more cash for deal-making and the share price would rise precipitately, it was argued. Further, Mr Glasenberg rather liked the diversification the deal gave Glencore.
The offer was 2.8 Glencore shares for one Xstrata share. Xstrata shareholders were reluctant, saying the deal undervalued their stakes. And then there was the associated and mishandled matter of huge retention payments for 73 key Xstrata managers, which totalled £144m. The payments appeared little more than money for turning up for work in the morning.
Mr Davies, though, had thought through the process. Although 2.8 was initially the most the Xstrata board believed it could get out of Glencore, it was stipulated that the deal would be a “scheme of arrangement”, meaning that 75pc of shareholders would have to agree and Glencore could not vote their stake. This, as Mr Davies knew, put an awful lot of power in the hands of his Qatari investors who held an 11pc stake. They now had the whip hand and they used it, going public with a demand that Glencore sweeten its offer to 3.25 shares for every Xstrata share.
The move pushed Glencore up to 3.05 shares with the proviso that it was more clearly a takeover rather than a merger. Mr Davies will now only stay six months if the deal is agreed and Mr Glasenberg will become the standalone CEO.
This at least is clear and takes away one of the headwinds the deal faced an unsustainable structure which left Mr Davies as the CEO of the new entity and Mr Glasenberg as his deputy. Rather than sitting on the same bed, the two gorillas were going to be asked to share it, an arrangement that simply would not have worked.
But where one of the Hydra’s heads has been cut off, another has appeared. And it is the bizarrely complex set of voting options for the shareholders who will have to make their decision on November (Xetra: A0Z24E - news) 20.
They can vote for the deal including the retention payments since qualified with some targets that the managers have to hit. They can also vote for the deal without the incentive agreements.
There is then a third vote under a different 50pc rather than 75pc hurdle on whether the retention payments should be paid in any case, a vote that could scupper the first two options, whichever way they go. As they used to say on the US hit sitcom Soap “Confused?”
Advisors to both sides are now so concerned that they are calling on shareholders to turn up in person, rather than using their proxy votes, to ensure they understand the set of options in front of them. Hanging chads in Florida had nothing on this voting soup.
At least there was good news this weekend for those who back the deal, when Scottish Widows Investment Partnership, one of Xstrata’s top-10 investors, came out in favour.
“We are supportive of the merger and the revised incentive arrangements,” said Anne Fraser, head of corporate governance at SWIP. “The merger will bring together two different but complementary businesses.”
But the Hydra has many heads and many different opinions. A second Xstrata investor was quoted by Reuters as saying: “We are voting against the remuneration, and anyone who isn’t voting against the remuneration really ought to shut down their corporate governance departments and tell people that they just don’t do [corporate governance] anymore.”
Xstrata and Glencore are inching towards a match, with or without the retention payments. Mr Davies will leave and shareholders will want a clear sense of direction from Mr Glasenberg, not least on what he plans to do with Xstrata’s 25pc stake in Lonmin’s South African platinum mining business.
Glencore is not known for its love of platinum but will surely hold fire on making a decision to sell down the stake, demand management changes or even plot a takeover. Whatever happens, Glencore is certain to start with a clear demand for board representation.
In the end, and slightly wearily after such a long journey, the deal does makes sense, although I am not convinced about the need for the payment options. If people want to work for Glencore they will be well paid, with or without extra inducements.
Welcome, then, to the new world of Glencore and Xstrata. As the old joke goes, how do two porcupines make love? With great caution.