By Clara Ferreira-Marques and Chris Vellacott
LONDON (Reuters) - Glencore
The world's largest diversified commodities trader, which already owns 34 percent of Xstrata, began courting institutional investors this week after publishing 2011 earnings -- starting its first roadshow since the all-share deal was agreed in February.
Alongside its results earlier this week, Glencore defended a "merger of equals" proposal which it says is fair and already offers Xstrata shareholders a premium, as well as the top jobs in the enlarged company. The trader's boss and single largest shareholder, Ivan Glasenberg, will be deputy chief executive, reporting to Xstrata's Mick Davis.
Industry and shareholder sources say Glencore has been just as apparently uncompromising in its meetings with investors as it attempts to woo the market with its growth prospects -- warning of "asymmetric" risks for Xstrata shareholders if the deal does not go ahead, and cautioning it has rejected deals before after failing to agree terms.
Analysts agree that Xstrata shares would be hit in the short term if the deal does not go through, not least because Glencore will remain a 34 percent shareholder -- but Glencore itself is also likely to suffer.
And some of the prominent naysayers among Xstrata holders are standing their ground, making for tension which is unlikely to ease in the weeks to come, given little incentive for either side to concede anything much before a shareholder vote which could come as late as June or July.
"We have now met with the managements and our feelings remain unchanged - we feel the deal not only undervalues Xstrata (but) we feel we are being offered unattractive paper," said Neil Dwane, Chief Investment Officer of RCM, the equities unit of Allianz Global Investors, a top-40 shareholder. "We do not like the deal and will await a higher offer, hopefully."
Dwane said he would be happy to own just Xstrata shares, but pointed to "difficult" corporate governance if Glencore was to remain a major shareholder.
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Glencore, which cannot use its own 34 percent of Xstrata to vote for the deal, cannot afford to dismiss any shareholders. The bid requires 75 percent acceptance among the remaining 66 percent, so only 16.5 percent of the total shares are needed to torpedo it. More than a quarter of Xstrata shares are held by smaller shareholders.
"I'm not sure the general feeling (about the deal) has changed," said Mark Wright, deputy manager of Mam Funds' CF Midas Balanced Growth Fund, which is a small shareholder in Xstrata, pointing to Glencore's short track record as a listed company. The trader listed in May last year.
"Obviously Glencore management are going around trying to prove a track record of return on investor capital, but they are a bit of a black box to some, which is why they are struggling to win some people over," he said.
Glencore, which is offering 2.8 new shares for every Xstrata share, has not explicitly excluded any option -- even sweetening the deal -- but analysts warn risks are increasing.
"The market may be overestimating the likelihood of Glencore increasing its offer for Xstrata, and the extent by which Glencore might bump its offer if it does indeed plan to do so," Jefferies analysts said in a note this week, adding Glencore's roadshow would at least be softening expectations.
Most analysts and investors, though, still agree there is likely to be at least a face-saving improvement to take the deal over the finish line. "I think they could end up paying a smidgeon more," one UK equities fund manager, a top 50 holder of Xstrata stock, said.
Glencore has been visiting UK institutions this week and will move to U.S. institutions next week, with Asia targeted the week after that. Davis and the Xstrata team are expected to team up with Glencore for a round of meetings in early April, ahead of a shareholder circular to be sent out later that month. ($1 = 0.6323 British pounds)
(Additional reporting by Sinead Cruise; Editing by Elaine Hardcastle)