LONDON Xstrata's XTA.L directors, facing a Monday deadline to deliver their verdict on Glencore's $32 billion bid, are hammering out a deal they hope will ensure the miner retains control of the combined group's board, even after the exit of its veteran boss.
All sides are working towards completing an agreement and announcing the board's recommendation by October 1, sources familiar with the deal said on Friday. However, the struggle to reconcile wide-ranging shareholder views, to ensure the success of the current, last-ditch attempt to merge, meant Xstrata's board could still ask for more time.
Glencore (GLEN.L), the world's largest diversified commodities trader, bid in February for the shares in Xstrata it did not already own, launching one of the resources sector's biggest ever takeover deals. But it was forced earlier this month to raise its price - offering 3.05 new shares for every share held, up from 2.8 - in an effort to rescue the tie-up after opposition from the miner's number two investor, Qatar.
As a condition of the change, however, Glencore imposed its own chief executive and largest single shareholder - Ivan Glasenberg - at the helm of the combined group, at the expense of Xstrata's mining veteran boss, South African Mick Davis.
As Glasenberg was already due to sit on the board, Davis's departure within six months of concluding the deal leaves an empty spot - and one that is key to the balance of the 11-strong board. Under the original deal, Xstrata would have six board seats including the chairman, while Glencore would have five.
Sources familiar with the matter said Xstrata was not necessarily seeking a specific name, but they said the miner wanted "assurances" that a satisfactory mechanism would be set up to allow it to retain the majority of seats. Without it the deal would be a takeover and arguably require a higher premium.
"I'd be staggered if this didn't happen now," one top-50 investor in Xstrata said. "There's been unexpected give on both sides - Qatar and Glencore."
Xstrata's board is widely expected to recommend Glencore's revised, higher offer, having backed the lower offer. But its independent directors - already under fire from some minority shareholders angry that the board supported a bid many of them opposed - want to ensure the miner holds on to the team at the helm of its operations which is also expected to deliver some 20 projects by 2014, including four major greenfield sites.
The board had hoped to link a retention package for Xstrata's top employees to a vote on the deal itself thereby keeping the team responsible for its major industrial assets and the bulk of its profits.
But several top shareholders have objected, with some warning they would vote down any such package they consider excessive - and the merger in the event of a combined vote.
SPLITTING THE VOTE?
With just days to go, sources familiar with the deal said the directors could ultimately agree to separate shareholders' vote on the bid from the vote on the more emotive issue of pay.
That would allow Xstrata's board to keep the retention package it is reluctant to change - more than 140 million pounds ($226.7 million) over two years, excluding the outgoing Davis - but allow some shareholders to vote against it without imperilling the deal.
"There is a lot to balance. It is not as simple as (funds and key owners) Blackrock and L&G against the other shareholders - there are wide-ranging views," one of the sources said.
Among other funds, both BlackRock and L&G, which together own 6.5 percent of Xstrata shares, have signalled they do not support elements of the deal.
Qatar, which is not expected to make a public statement until Xstrata lays out its board's position, is said by some sources to support the retention payment and the new terms, but its ultimate position is still uncertain, leading to what several sources said was a "tense atmosphere" on all sides.
Qatar, with just over 12 percent thanks to regular share buying, has proven an unlikely kingmaker in the deal.
Hedge funds have also found themselves in the spotlight - their support could be critical, in a deal where shareholders representing just 16.5 percent of total shares could block the deal. These funds represent 10 percent of Xstrata at the moment, just enough to outweigh vocal rebels including Knight Vinke, Schroders and others.
The Xstrata board's decision, if ultimately positive, will pave the way for Glencore to file its long-awaited antitrust notification with the European Union, setting the regulatory clock ticking in Brussels, the sources said.
Glencore had been expected to file that notification by the end of September, after months of negotiations with officials to avoid a lengthy, in-depth probe. ($1=0.6176 British pounds)
(Additional reporting by Sinead Cruise in London and Foo Yun Chee in Brussels; Editing by Mike Nesbit)