Xstrata's directors, facing a Monday deadline to deliver their verdict on Glencore's $US32 billion offer, 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 toward completing an agreement and announcing a board decision by Oct. 1, sources familiar with the deal said on Friday. The struggle to reconcile wide-ranging shareholder views, to ensure the success of the current, last-ditch attempt to merge, mean Xstrata's board could still ask for more time - but several of the sources pointed to a Monday deal.
"I now see an 80 per cent chance a deal will be announced early on Monday", said one source familiar with the talks.
Glencore, 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 No. 2 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."
Splitting the vote
Xstrata's board is widely expected to recommend Glencore's revised, higher offer, having backed the lower bid. 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.
In a bid to secure maximum support for the deal, Xstrata's board could bow to investors and split the two previously connected shareholder votes on the deal - one on pay packages to retain top managers and one on the merger itself - or at least make its recommendation conditional on the retention deals, sources familiar with the talks said.
That would allow shareholders to express their opinions on pay separately from their views on the merger with Glencore.
Two of the sources said a decision had been reached to split the votes, while a third source close to the negotiations said the final structure was still being agreed.
"(A split) will give shareholders the ability to choose an alternative. Those who only want a deal with Xstrata's managers will be able to do voice that," said one of the sources.
Another of the sources said Xstrata was still trying to reconcile contradictory views: "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."
Among other funds, both BlackRock and L&G, which together own 6.5 per cent of Xstrata shares, have signaled 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 per cent 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 per cent of total shares could block the deal. These funds represent 10 per cent 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.
Morning & Afternoon Newsletter