Close, but no Qatar for Glencore?

Over the past few weeks Glencore's Ivan Glasenberg and Xstrata's Mick Davis would have known their proposed $65 billion merger was in trouble, but would have believed it was salvageable. A development overnight, however, has pushed the deal to the brink of collapse.

Until yesterday Glasenberg and Davis were trying to defuse a shareholder revolt over plans to pay massive retention bonuses to Davis and his key executives. About 73 executives were set to receive payments totalling almost $270 million over the next three years – and Davis himself about $45 million – without any performance hurdles.

Not surprisingly, there was a massive shareholder backlash occurring against the payments that was threatening to derail a deal the companies have been promoting for nearly five months and which in reality has been years in the making.

Glasenberg and Davis appeared ready to bow to that pressure and, at the very least, put some performance criteria next to the retention bonuses.

With Xstrata shareholders scheduled to vote on the merger on July 12 there wasn't a lot of time left to shore up the "yes" vote for a deal that requires the support of 75 per cent of shareholders, excluding Glencore's 34 per cent stake. If 16.5 per cent of capital votes against the merger, it will fail.

From the moment the merger was unveiled, and described as a "merger of equals" despite a 15 per cent premium to Xstrata's pre-merger announcement price, Xstrata shareholders have complained that Glencore isn't offering a sufficient premium for control of Xstrata and its big portfolio of resource assets.

The opposition appears to have been focused largely on the terms of the merger, rather than the logic of putting the companies together, although there have been some mutterings from Xstrata shareholders about the volatility within Glencore's trading businesses.

After traipsing around the world for months promoting the benefits of a merger between the world's biggest commodity trader and one of the global mining giants Glasenberg and Davis would have felt that the retention payments were the last obstacle to a deal, with Xstrata shareholders well aware that a rejection of the merger would send Xstrata shares tumbling.

That was, however, until Qatar's sovereign wealth fund, Qatar Holding, put out a statement yesterday saying that while it saw merit in a combination of the companies it wanted an improvement in the terms. Qatar, which owns just under 11 per cent of Xstrata, wants the exchange ratio of 2.8 Glencore shares for every Xstrata share to be lifted to a "more appropriate" 3.25:1.

If Qatar votes against the deal it will almost certainly be rejected at the shareholders' meeting in just over a fortnight's time, given the low threshold for voting it down.

The Qatar pronouncement means that if they want to save the merger Glasenberg and Davis will now have to be prepared to not only re-cast the retention arrangements but to urgently renegotiate the terms of the merger to shift significant value from Glencore's shareholders, dominated by its executives, to Xstrata's. That may be more easily said than done.