Glencore and Xstrata still have mountain to climb in Everest merger

London Briefing:When Glencore and Xstrata picked "Everest" as the codename for their secret merger talks a year ago, they can have had little idea just how appropriate their choice would prove, given the mountain they have had to climb to push the deal through.

The mining mega-merger was finally approved by shareholders yesterday, 10 long months after it was first made public. It is the biggest deal in the London market this year and among the biggest seen in the mining sector.

For Glencore’s billionaire chief executive, Ivan Glasenberg, and his Xstrata counterpart, Mick Davis, it is the culmination of years of on-off talks on combining the two companies. But at what cost has their dream been fulfilled?

The tortuous negotiations have not enhanced the reputation of either side and the board of Xstrata, in particular, looks totally discredited. While Xstrata shareholders approved the merger yesterday, in a stinging rebuke to the board, they refused to back the lavish retention bonuses for senior executives that Xstrata chairman Sir John Bond and his team insisted were a vital component of the deal.

Some 70 Xstrata employees were to have shared about £140 million (€174 million) in bonuses, to be paid out over three years, in an effort to keep them loyal after the deal.

With the “golden handcuff” packages blocked against his advice, Bond has at least done the decent thing and announced he will depart once a replacement is found.

Shareholder anger

In reality, Bond had little choice. There was real anger among Xstrata shareholders at his failure to properly represent their interests and his insistence on the retention payments.

It is an ignominious end to the career of the former HSBC and Vodafone chairman.

When the deal was unveiled in February – a little hastily, after news of it leaked – it was billed by the two FTSE 100 companies as “a merger of equals”, bringing together the powerful commodity trading operations of Glencore with Xstrata’s extensive mining operations. Together, the two would become the world’s fourth-largest natural resources conglomerate.

Although Xstrata provides the bulk of the assets, under the initial terms of the deal its share of the combined company was a rather less than equal 45 per cent. But there was the promise that the top jobs would go to its chairman, Bond, and chief executive, Davis, which appeared to soften the blow.

It didn’t take long for Xstrata shareholders to kick against a deal that looked just a little too cosy, and a little too good for Glencore, eventually forcing that company to increase the terms of its share swap offer. Along the way, Glasenberg bagged the top job, ending any pretence of a merger of equals.

Champagne corks were no doubt popping around the City last night on news that the deal had been approved – the two sides had drafted in a huge team of advisers, including Citigroup and Morgan Stanley for Glencore and Deutsche, JP Morgan, Goldman Sachs and Nomura for Xstrata.

Blair role

And then there was the walk-on part for former British prime minister Tony Blair, who acted as mediator between Glasenberg and Middle East sovereign wealth fund Qatar Holding, the Xstrata shareholder which led the campaign for improved terms from Glencore. Blair is rumoured to have earned some £600,000 for his intervention, said to have consisted of brokering a three-hour meeting at Claridge’s hotel in London.

In total, advisory fees for the deal are estimated in the region of £130 million.

Now the deal has been approved, it must be made to work. The combined company, to be called Glencore Xstrata International, will be massive, with a market capitalisation of £50 billion-plus and almost 130,000 employees. It will operate in more than 30 countries, have more ships than the royal navy and interests ranging from oil and commodity trading to copper, gold, coal and platinum mining.

With Glasenberg’s deal-making expertise, further expansion moves are expected (more good news for bankers, lawyers and accountants).

But a new chairman must be found and bridges urgently need to be built with shareholders, who have made it clear they will not stand for any nonsense. At the same time, the 70 key employees who saw their golden handcuffs snatched away must be kept happy, or they will simply walk.

Getting the deal approved may have looked like the biggest challenge in this tangled takeover saga, but the toughest part of the Everest assault may yet lie ahead.

* Fiona Walsh writes for the Guardian newspaper in London