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Last updated: November 2, 2012 11:32 pm
However, ISS recommends investors vote against the multimillion-dollar payout that Xstrata has put in place to retain its most senior executives.
The advisory group’s support increases the chances that investors will approve the merger, which would create one of the world’s largest natural resources companies, encompassing production, processing and trading of raw materials from crude oil and copper to wheat and natural gas.
ISS reversed some of its critical comments about the merger, including about the valuation. In its new report, the proxy voting agency said that although the premium offered by Glencore was below that of a full takeover in the mining industry, Xstrata is in effect already controlled by the trading house, which owns 34 per cent of the miner, reducing its options.
“Given the reasonable premium, some strategic and corporate governance upside, and simplification of shareholder structure, we recommend that shareholders vote for the proposed transaction,” it said. “The 22.1 per cent premium as measured in the September announcement appears as reasonable given the particular circumstances.”
ISS said the deal offered some “net upside” for Xstrata’s shareholders from a strategic point of view. “Similarly there is an upside with the corporate governance arrangement. The simplification of the shareholder structure is a compelling point.”
Glencore and Xstrata have proposed a new vote on November 20 on a merger that in effect delinks a vote on the merger from a vote on the retention package.
The payout had been criticised by some institutional investors such as BlackRock. But the retention package is supported by other investors, including Qatar Holding, the second-largest Xstrata shareholder. The miner’s board has recommended investors approve the retention deal.
“ISS believes that companies should not bundle voting items, and in this case, voting for both merger alternatives would effectively unbundle the vote.”
Glencore is now offering 3.05 of its own shares for each Xstrata share, up from an initial offer of 2.8 shares tabled in February.
The share ratio between Glencore and Xstrata has risen, suggesting investors are confident the merger will close. On Friday, the ratio was at 2.87 times, one of the highest levels since the deal was announced.
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