A torrent of hostility was sweeping down on Xstrata and its planned merger with Glencore last night as shareholders condemned a pay bonanza for directors and questioned the financial benefits of the tie-up.
Standard Life Investments, a top-ten Xstrata shareholder that has already demanded improved merger terms, said that “excessive” pay deals for executives made the merger “even less palatable”.
David Cumming, Standard Life’s head of equities, said that the miner’s remuneration payments — including a £30 million retention package for the chief executive Mick Davis — were “unacceptable and depressing”. He said that Standard Life, which is Xstrata’s sixth-largest shareholder with a 2 per cent stake worth more than £530 million, planned to vote against the proposed Glencore merger.
His comments came as investors fretted that the sheer size of the rewards on offer, worth £163 million to Xstrata’s senior managers over the next two years, would blow a hole in the merger’s financial benefits.
Glencore and Xstrata have said that their combination would generate benefits worth $500 million during the first year after it completes — but, on top of the retention awards, Glencore and Xstrata could pay up to $130 million in fees to financial advisers and corporate brokers plus a further $40 million in legal expenses.
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One leading shareholder estimated that fees to bankers and handouts to directors would wipe out 20 per cent of the expected financial benefits in the first year.
“Mick has been bought off and all of the directors of Xstrata have done an appalling job of representing the interests of all shareholders,” another influential investor said.
Mr Cumming said that Standard Life questioned whether the retention awards were necessary for a management and executive team that was supposedly in favour of the merger.
Under the plan, Mr Davis would receive £9.6 million in cash and shares in each of the next three years. On top of that, he will be enrolled in a new incentive scheme that could pay out an annual bonus worth 400 per cent of his annual salary of £1.5 million.
“The proposed remuneration payments, the payout of existing service contracts, the vesting of outstanding incentive awards and the excessive retention payments to ensure the commitment of a management team who are supposedly supportive of the deal, all without any requirement in terms of performance conditions to deliver anything for shareholders, is unacceptable and depressing,” Mr Cumming said.
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“This document [the prospectus for the merger, published this week] makes supporting Glencore’s already inadequate offer for Xstrata even less palatable. Consequently, we still believe it should be opposed.”
It is understood that Standard Life was among several investors to warn Xstrata in advance of the dangers of showering unwarranted largesse on its directors as a condition of the merger going through. Shareholders are also furious that the two companies are making it far harder for them to oppose the executive awards as the vote on the merger is conditional on the pay policy being voted through.
Robert Talbut, the chief investment officer at Royal London Asset Management said: “It is clear that the issues around this deal have gone beyond simply evaluating the mechanics of the immediate transaction and instead raise a number of fundamental issues concerning the precedents that are being established.”
Xstrata was forced to defend the payments for a second day running. Sir John Bond, the chairman, said: “Retaining a stable management team with a track record of value delivery is in the interests of Xstrata shareholders.”