Qatar wants better terms in Glencore-Xstrata deal

The logo of Glencore is seen in front of the company's headquarters in the Swiss town of Zug May 9, 2012.

BEIRUT, ATHENS (Reuters) - Qatar, Xstrata's XTA.L second largest shareholder, threw a huge roadblock in the way of Glencore's (GLEN.L) $30 billion (19 billion pounds) takeover of the mining company on Tuesday, with a surprise demand for better terms, which could jeopardise the deal.

The 11th hour rebuff will make it very difficult for Glencore and Xstrata to push the merger through on current terms, several sources close to the deal said, leaving only until Thursday evening for Glencore to sweeten the deal or be forced to delay shareholder meetings scheduled for mid-July.

Qatar, which has built up its stake of around 11 percent in Xstrata since February, and could be a kingmaker for the takeover, said that Glencore should pay 3.25 of its shares per Xstrata share, rather than the 2.8 on offer.

The sovereign wealth fund's role is vital as the terms of Glencore's bid needs approval from 75 percent of shareholders in Xstrata, excluding its own 34 percent holding in the mining company.

That means that if investors owning 16.5 percent of Xstrata's total shareholding voted against the deal, it would fail.

"Whilst it (Qatar Holding) sees merit in a combination of the two companies, it is seeking improved merger terms," it said in a statement emailed late on Tuesday.

It said the new proposed share ratio "would provide a more appropriate distribution of benefits of the merger whilst properly recognising the intrinsic standalone value of Xstrata".

Xstrata and Glencore both declined to comment. Sources working on the deal, however, told Reuters they were taken aback by the last minute request by Qatar.

Xstrata shares closed on Tuesday at 785.8 pence while Glencore was at 302.7, implying a share ratio of 2.6 times.

"There seems to be coordination between major Xstrata shareholders on the proposed exchange offer," said a banker close to the deal.

"We believe that the Qataris, among other shareholders, will vote against the existing deal if the terms don't change to give them a better valuation."

Qatar Holding, a unit of Qatar Investment Authority, is now being advised by Lazard (LAZ.N), having previously not retained bankers on the deal.

It is the first time Qatar's sovereign wealth fund has taken such an activist role in one of its holdings. QIA owns stakes in several companies including German engineering group Siemens (SIEGn.DE), oil major Shell(RDSa.L) and British bank Barclays (BARC.L).

"This is not dumb money," said another person familiar with negotiations. "As a shareholder they are focused on the most material issue (the ratio)."

The timing of its opposition could knock the deal off course as the companies only have until Thursday to alter the deal terms if they still want their shareholders to vote on the merger at meetings currently slated for July 11 and 12.

The news of Qatar's request for better terms comes hours after sources said Glencore and Xstrata were considering changing retention packages worth around 170 million pounds offered to 73 key executives because of angry shareholder feedback.

Xstrata's Chief Executive Mick Davis alone was due to receive 30 million pounds over three years.

"We didn't see this (the rebuff) coming. This is about shareholders. The Mick Davis compensation package irritated a lot of people," said one person familiar with the matter.

The retention packages, which may now be changed to include a performance link and more equity rather than pure cash, are intrinsically linked to the deal meaning that a vote against the pay deal would effectively be a vote against the takeover itself.

There are risks to both sides if the deal fails, with analysts estimating that Xstrata's shares would drop by 30 percent or more if the deal fails.

Last week, influential shareholder body the Association of British Insurers issued a 'red-top' alert on the retention proposals, raising concerns that the awards were not linked to performance.

Xstrata shareholders Standard Life and Fidelity Worldwide have also spoken out, with Fidelity calling the retention agreements "provocative and insensitive".

(Reporting by Paritosh Bansal, Jane Barrett and Victoria Howley, Writing by Jane Barrett; editing by Gary Hill, Andre Grenon and Carol Bishopric)