DealBook: Hedge Fund Manager to Admit to Wrongdoing in Revised Deal With S.E.C.

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DealBook: Xstrata Board Supports Glencore's Revised Offer

Arnd Wiegmann/ReutersIvan Glasenberg, chief of the commodities trader Glencore International.

11:13 a.m. | Updated

The board of the mining company Xstrata announced on Monday that it was backing a revised takeover bid from the commodities trader Glencore International, putting the $90 billion merger back on track.

To sidestep shareholder opposition to executive bonuses worth potentially more than $200 million, Xstrata will now ask investors to support the deal even if they do not agree with the proposed incentive plan.

The change comes after Glencore raised its takeover bid in September, offering 3.05 of its shares for each Xstrata share.

In exchange, however, Glencore had proposed that its chief executive, Ivan Glasenberg, should take over the unified company six months after the merger was completed. Under the original terms of the deal, Xstrata’s chief, Mick Davis, and his management team were set to retain control.

Xstrata confirmed on Monday that Mr. Davis, who will now not participate in the proposed executive incentive plan, would step down from his post after six months if the merger was approved, though Xstrata would still retain a majority of the combined group’s board seats.

The changes in the new offer raised the possibility that top mining executives would depart, leaving the combined company without veteran leaders in its core business. Mining is expected to account for 84 percent of the unified company’s operating profit, based on last year’s earnings.

A major hurdle to winning shareholder support has been bonuses that Glencore and Xstrata had been negotiating to retain top executives. The payouts — worth more than $200 million — have angered several major shareholders.

Some institutional investors, including BlackRock and Legal and General, have been said to oppose the retention payments as too extravagant. That has prompted Xstrata to revise the bonus packages to more closely link them to performance targets, though they remain basically the same size.

In a vote to be put to Xstrata shareholders in November, the company will now offer investors three options when deciding on the deal.

Shareholders can vote in favor of both the merger and the retention bonuses, back the proposed combined group without supporting the incentive plan or oppose the merger altogether.

Xstrata’s board has recommended that shareholders support both the merger and incentive plan.

A vote on the merger will need the support of at least 75 percent of Xstrata’s eligible shareholders to pass, while a decision on the retention bonuses will only need the backing of 50 percent of investors.

“We have decided to decouple the resolutions to approve the merger from the resolution to approve the revised management incentive arrangements,” Xstrata’s chairman, John Bond, said in a statement on Monday. “This will enable shareholders to vote in line with their convictions.”

Despite the attempt to appease shareholders, some investors remained skeptical.

Knight Vinke, the American activist investor, said on Monday that the deal would lead to a change in control at the combing group. The British institutional investor Threadneedle Investments also said it would vote against the merger based on its current conditions.

“No one should be in any doubt that this is effectively seen as a takeover,” Threadneedle’s head of governance and responsible investment, Iain Richards, said in a letter to Xstrata’s board on Monday. “The benefits of doing this deal seem heavily weighted in favor of Glencore, which clearly needs this far more than Xstrata does.”

Shares in Xstrata rose 2.6 percent in afternoon trading in London on Monday, while stock in Glencore fell less than 1 percent.

The decision by Xstrata’s directors to proceed with their recommendation keeps afloat a merger that would create a behemoth in the world of mining and minerals.

The proposed transaction, first announced in February, would unite Glencore, a giant commodities trading house, with Xstrata, its longtime mining partner.

Together, the two would create an international mining company with significant physical assets and an enormous trading operation that has invaluable insights into global demand for minerals.

The talks have drawn in many of London’s top deal makers, generating big fees for the bankers involved if the transaction is approved. Citigroup and Morgan Stanley are advising Glencore, while Deutsche Bank, JPMorgan Chase, Goldman Sachs and Nomura are advising Xstrata. Michael Klein, a former top deal maker at Citi, has been advising the management teams on both sides.

But the talks have been bogged down for months over questions about who would lead the combined company and how much it would cost to retain important Xstrata executives.

One wild card remains: the sovereign wealth fund Qatar Holding.

The fund, the second-biggest shareholder in Xstrata after Glencore, has kept silent on the revised takeover bid. An adviser to Xstrata said previously that the fund was less concerned about the payouts than about retaining top company executives. A spokeswoman for Qatar Holding declined to comment on Monday.

With its 12 percent stake, Qatar Holding is seen as a crucial component to winning approval of any deal. The sovereign wealth fund has said it will wait until Xstrata makes its announcement before making its own decision.

“The key risk of a deal failure rests once again with Qatar Holding,” Ash Lazenby, an analyst at Liberum Capital in London, wrote in a note to investors on Monday, adding that the proposed merger might still fail if the Middle Eastern sovereign wealth fund did not support the executive incentive plan.

Last Quarter’s Growth Is Revised Down Sharply

The revision was down from the 1.7 percent rate the government reported in August. The economy grew at a 2 percent pace in the first quarter of the year and 3 percent at the end of 2011.

With just 40 days to go until the election, the weak growth figure was sure to take on a strong political resonance. Mitt Romney has battered President Obama for failing to foster a robust recovery and has pinned the economy’s weak jobs growth on his policies. Mr. Obama has conceded that the recovery has been anemic, but has argued that his administration put the economy on the right track after the worst recession since the Great Depression.

Thursday’s report underscored that the recovery has proved insufficient to pull down the unemployment rate, which has been stuck between 8.1 percent and 8.3 percent all year.

The renewed weakness this month spurred the Federal Reserve to act to support the economy, putting in place a third major round of bond purchases designed to aid the nascent housing recovery and to encourage employers to add jobs.

Much of the downward revision to the second-quarter figures was because of the effects of the nation’s worst drought in 50 years. Farm inventories dropped in the second quarter, after falling in the first as well.

More broadly, cuts to state and local government spending have held down growth, and private firms have hesitated to invest during the poor business climate, despite the attraction of low interest rates on loans.

A separate report Thursday showed the manufacturing sector, one of the brightest spots in the recovery, contracting as well. The Commerce Department said that durable goods orders, a key measure of manufacturing strength, plunged 13.2 percent in August, far more than economists had anticipated and the steepest drop since the worst of the recession in the winter of 2009.

Much of the drop was from orders for aircraft.

Still, the economic news was not all bad. The Bureau of Labor Statistics issued revised numbers for employment that raised the estimate of jobs in the economy last March by 386,000, or 0.3 percent — enough to make President Obama a net job creator over his tenure.

The report, adjusting data that will be refined once more, follows a trend of the bureau underestimating job growth when the economy is expanding and underestimating job losses when the economy is contracting.

That proved the case in the early-2000s recession following the collapse of the tech bubble, the massive recession that started in 2008 and the period of economic expansion in between.

Indeed, the Great Recession proved much worse than government policy makers understood as it was happening, with the economy shedding hundreds of thousands more jobs than initially estimated.

In August, the Bureau of Labor Statistics said that it had overestimated job growth in June and July, revising down the number of jobs added in those months by more than 40,000. Thus, the bureau estimates the economy added fewer than 100,000 jobs a month through the summer months – not enough to pull down the unemployment rate, given normal expansion in the labor force.

But housing has recently proven a surprising bright spot, with sales and prices starting to climb in many regions of the country. On Thursday, the National Association of Realtors said that pending home sales retreated slightly in August after reaching a two-year peak in July. The level of pending home sales — a measure of properties under contract but not yet closed on — has risen more than 10 percent in the past year.

Many housing experts expect a sustained, slow recovery in the market. On Thursday, the average rate on a 30-year fixed mortgage fell to a record low of 3.4 percent. Low mortgage rates, driven in part by the new Federal Reserve program, are expected to drive more Americans to refinance their homes and to encourage purchases as well.