* Qatar said on Tuesday wants better terms
* Xstrata proposes changing management incentives
* Deal valued at $26 bln at current share prices
* Glencore could walk away from deal
By Kate Holton and Sinead Cruise
LONDON, June 27 Commodities trader Glencore
fought to save its $26 billion bid for miner Xstrata
on Wednesday after shareholder Qatar stunned the pair
with a late demand for better terms, forcing them to push back
the timing of the deal.
The Qatari intervention pushed the deal to the brink as it
prompted a string of major shareholders to revisit their own
concerns, such as soaring executive pay and fears that the
combined entity would take on riskier business.
Qatar had remained silent for months as it built the
second-largest stake in Xstrata, before calling late on Tuesday
for 3.25 new Glencore shares for every Xstrata share, up from
the 2.8 on offer.
"Three cheers for the Qataris," Richard Buxton, head of UK
equities at Schroders, told Reuters. "We've said all along that
the ratio was wrong so they've either now got to improve the
terms or see this deal get voted down."
Glencore would have had to make any changes to the deal
terms by Thursday evening if its shareholders were to approve
the takeover in mid-July as originally planned.
Glencore said it would adjourn its shareholders' meeting
which had been due on July 11 and Xstrata said it would convene
a new meeting when it had updated the executive pay deals which
had been another major bone of contention.
The 11th-hour call from the Qatar Investment Authority (QIA)
emboldened other investors angered by the hefty packages
offered to retain top executives at Xstrata, including an extra
29 million pounds over three years just to keep CEO Mick Davis.
In an attempt to appease investors, Xstrata said the awards
would now be paid in shares and would only fully vest if an
additional $300 million of cost savings were achieved in two
"They made a terrible mistake by first of all tying
retention packages directly to the bid. That was naïve and very
arrogant on their part," said one top 40 Xstrata shareholder.
"If (the ratio) stays at the current terms, i.e there is no bump
(up), I don't think they will succeed. The share price is
telling you that as well."
Xstrata shares closed on Wednesday at 790.7 pence, still
pricing in a 2.6 ratio against Glencore. If the terms were not
changed and the bid failed, Xstrata's shares are expected to
drop by 20-30 percent, analysts have said.
Analysts said the about-turn on pay showed the two companies
were starting to get the message, but that the structure of the
deal would prove much harder to resolve. They thought the
opening gambit from Qatar was a negotiating ploy and that a
ratio of 3 from the current 2.8 would win over investors.
In its Thursday edition, the Financial Times quoted people
familiar with the deal as saying Glencore would be ready to walk
away from the deal if Qatar insisted on a higher ratio.
"This is step one and it looks as though they may have done
enough. Step two is to agree an offer ratio and that looks to be
very much in the hands of the QIA," Charles Stanley analyst Tom
Paul Lee, director of Hermes Equity Ownership Services,
which is voting on behalf of around 1 percent of Xstrata's
investors, said a simple bump-up in the ratio would not be
enough to persuade them to back the deal.
"Xstrata, to our mind, has a pretty good record in risk
management. That is less true of Glencore. Lots of investors are
most troubled by the ratio and the retention packages, but they
haven't really focused on this issue," he said.
Analysts and other Xstrata shareholders warned that Glencore
could simply refuse to budge on the larger issue of the deal
structure, putting the bid at risk and delaying any subsequent
effort for at least six months and perhaps as long as a year.
"Whether Glencore now wishes to raise its offer, having
faced down independent shareholders for the last four months, is
questionable," said Neil Dwane, CIO of Allianz Global Investors
Europe, another top 35 Xstrata investor.
"The Qatar ratio would be circa 10 percent dilutive to
Glencore. In fact, given the coordinated global economic
slowdown, an argument could be made for actually lowering the
price to reflect worsening prospects for miners."
The Thomson Reuters-Jefferies CRB index, a barometer
for commodities, has fallen by about 14 percent since early
February, when Xstrata and Glencore announced the deal.
The statement triggered intense negotiations and a charm
offensive from Glencore executives trying to understand the Gulf
state's motivations and bring them back onside.
Meetings between Qatar and Glencore were taking place,
people familiar with the situation said. At a ratio of 3.25
percent, the offer would be worth $30 billion as opposed to $26
billion for a ratio of 2.8.
The structure of the offer gives minority investors
substantial power - opposition from just over 16.5 percent of
the total shareholding could sink the deal, given approval is
required from 75 percent for the main vote on the offer, and
Glencore does not vote.
The vote on pay requires a simple majority, but both will
need to go through for the deal to succeed.
Glencore, already Xstrata's largest shareholder, with almost
34 percent, had been expected to improve the terms of its
all-share deal in the early days after it was announced.
However, it stuck to its guns as Xstrata faced falling thermal
coal prices and increased uncertainty over Argentina and Peru,
which are important to its growth prospects.
Analysts doubted that Glencore would raise its bid to as
much as 3.25, the high end of initial expectations and a level
at which some say the deal could destroy value for Glencore.
"We believe a bump - probably from 2.8 to 3.0 Glencore
shares per Xstrata share - may be necessary to win over (Qatar)
and other Xstrata shareholders," Jefferies analysts said.
Analysts said a failure to secure the deal would not only
cause a drop in Xstrata shares, currently trading at a premium
to the sector, but would also prove damaging for Glencore, whose
bosses have long traded on their reputation as dealmakers.
It could also prove damaging for Qatar, which has invested
more than $4 billion to become Xstrata's largest minority
Richard Marwood, a portfolio manager at AXA Investment
Managers, a top 40 Xstrata investor, said the external pressure
from Qatar would give Glencore an opportunity to revise the
terms "without too much loss of face".
A collapse of the deal would also be a blow to a long list
of bankers involved in the deal, including Citigroup, Morgan
Stanley, JP Morgan and Deutsche Bank.
Glencore and Xstrata have declined to comment on the Qatari