August 22, 2012 9:15 pm

ISS criticises Glencore-Xstrata merger

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A tapper at work at Xstrata’s Lydenburg chrome smelter

Losing its shine: a worker at Xstrata's Lydenburg chrome smelter in South Africa. The merger with Glencore is looking less likely

The proposed Glencore-Xstrata merger suffered another blow on Thursday after ISS, the shareholder advisory firm closely followed by US institutional investors, recommended shareholders vote against the combination.

The setback came only hours after Ivan Glasenberg, Glencore’s chief, said it was ready to walk away from the multibillion-dollar merger amid opposition from Qatar’s sovereign wealth fund which, with a nearly 12 per cent stake in Xstrata, has enough power to block the deal on its own.

The proxy group blasted both companies on the terms of the combination, including the valuation and the retention packages for Xstrata’s executives. But ISS accepted that the companies would gain some “marginal strategic upside”.

ISS particularly criticised the retention package through which a group of Xstrata’s senior executives would pocket up to £173m if the merger with the commodities trader went ahead. ISS said the package followed a “history of poor pay practices which have taxed shareholder patience”. Mick Davis, the miner’s chief executive, is set to gain up to £30m if he meets cost-saving targets.

“Yet among big, diversified miners, Xstrata already pays its chief executive the highest salary for running the smallest company with the lowest five-year total shareholder return,” ISS said on its recommendation.

Xstrata has bowed to investor pressure over the retention packages. In June it revised the terms to link the payouts more closely to performance. The climbdown was the most high-profile win for shareholders in a wave of discord over pay between UK investors and company management.

ISS said the economic merits of the transactions were “marginal”, adding: “Based on measurable synergies, though, there may be room for a more compelling valuation.”

Glencore is offering 2.8 of its own shares for each Xstrata share, while Qatar is demanding Glencore lifts its offer to 3.25 shares. Other investors, including Knight Vinke, Standard Life, Schroders and Norges Bank, have all publicly and privately threatened to vote against the merger unless Glencore, which owns 34 per cent of Xstrata, improves its offer.

The group also criticised governance arrangements between the two companies, saying they were an “artificial construct to hold the pieces together”.

ISS, the US company owned by financial information group MSCI, is the world’s most influential shareholder advisory group, according to investors. It advises about 25 per cent of shareholders in FTSE-listed companies, investors say, having overtaken the Association of British Insurers and the National Association of Pension Funds in terms of influence. It was one of the main players in voting against the pay package of Sir Martin Sorrell, chief executive of advertising group WPP.

Additional reporting by David Oakley in London

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