Glencore delays $26 billion Xstrata bid after Qatar move

LONDON (Reuters) - Commodities trader Glencore pushed back its $26 billion bid for miner XSTRATA (XTA.LO) on Wednesday after shareholder Qatar stunned the pair with a late demand for better terms.

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.

The Qatar Investment Authority (QIA) had kept silent for months as it built the second-largest stake in Xstrata, then called 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's terms by Thursday evening if its shareholders were to approve the takeover in mid-July and allow it to seal the merger in the third quarter, as originally planned.

Glencore said it would adjourn its shareholders' meeting, which had been due on July 11. Xstrata said it would convene a new meeting when the offer papers had been updated and now expected the deal to complete in early October.

The new shareholder meetings would probably be called about a month late, a special situations adviser to hedge funds said.

As well as the share ratio, investors had been angered by hefty packages offered to retain top executives at Xstrata, including an extra 29 million pounds over three years just to keep CEO Mick Davis.

Xstrata said the awards would now be paid in shares, not cash and would only fully vest if an additional $300 million 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 percent, analysts have said.

NEGOTIATING PLOY?

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 would win over investors.

At a ratio of 3.25 percent, the offer would be worth $29.7 billion as opposed to $25.5 billion for a ratio of 2.8 and $27.4 billion at 3.

"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 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.

"The Qatar ratio would be circa 10 percent dilutive to Glencore," said Neil Dwane, CIO of Allianz Global Investors Europe, another top 35 Xstrata investor. "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 <.CRB>, a barometer for commodities, has fallen by about 14 percent since early February when Xstrata and Glencore announced the deal.

Glencore executives are now meeting Qatar representatives in a charm offensive to understand the sovereign wealth fund's motivations and bring them back onside, people familiar with the situation said.

The structure of the offer gives minority investors substantial power. Opposition from 16.5 percent of the total shareholding could sink the deal.

Glencore, Xstrata's largest shareholder with almost 34 percent, had been under pressure to improve the terms of the 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

At a ratio of 3.25, the high end of initial expectations, analysts said the deal could destroy value for Glencore.

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 in Xstrata.

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.

(Additional reporting by Sarah Young, Chris Vellacott, Clara Ferreira Marques and Victoria Howley; Graphic by Vincent Flasseur; Writing by Kate Holton and Jane Barrett; Editing by Will Waterman and David Stamp)

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