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London - Commodities trader Glencore fought to save its $26bn 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 £29m 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 $300m of cost savings were achieved in two years.
"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%, 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 Gidley-Kitchin said.
Paul Lee, director of Hermes Equity Ownership Services, which is voting on behalf of around 1% 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% 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% 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%, the offer would be worth $30bn as opposed to $26bn for a ratio of 2.8.
The structure of the offer gives minority investors substantial power - opposition from just over 16.5% of the total shareholding could sink the deal, given approval is required from 75% 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%, 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.
Moving target
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 $4bn to become Xstrata's largest minority shareholder.
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 announcement.
