At least two top 10 shareholders in miner Xstrata said Tuesday they would vote against a takeover by commodities trader Glencore, threatening the creation of a powerhouse spanning mining, shareholders except Glencore, which is barred agriculture and trading.
Standard Life Investments, the fourth largest investor in Xstrata, and Schroders said the deal, the mining sector's biggest, to buy the remaining 66 percent of Xstrata for $41 billion undervalued their shares.
The deal, designed to create a company to rival mining heavyweights such as BHP Billiton and Rio Tinto, needs to be approved by 75 percent of from voting.
The two investment funds own 3.6 percent of all Xstrata shares, but 5.6 percent of the shares needed for approval, according to Thomson Reuters data. Their stand may persuade others to follow suit.
I'm in complete agreement with Standard Life and we intend to do exactly the same. This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's majority shareholders, Schroders' Richard Buxton told Reuters.
Xstrata chief executive Mick Davis, who will be CEO of the enlarged company, admitted the two companies would have to work hard to bring some of his shareholders on board.
We clearly have to now go to our shareholders and speak to them and take them through the transaction ... we've got a long gestation period, we recognize that, he told an analysts' presentation.
The new group, with mining assets from New Caledonia to the Democratic Republic of Congo, is expected to use its clout to look at other deals, including potentially a takeover of Anglo American.
M&A is a space that you'd expect the combined group to be in, Davis told Reuters.
We have a combined entity which has much greater flexibility to be opportunistic and capture the right opportunities when they are there.
Glencore will issue 2.8 new shares for each Xstrata share in a deal it said was a merger of equals.
The ratio is a 15.2 percent premium to Xstrata shareholders compared with its share price last Wednesday before word leaked out about the merger talks, a joint statement said.
Xstrata chairman John Bond and Chief Financial Officer Trevor Reid will retain their posts, and Glencore CEO Ivan Glasenberg, a billionaire who owns 15.8 percent of Glencore, will be president and deputy CEO of the new company.
Xstrata shareholders other than Glencore, which already has a 34 percent stake in the mining group, will hold 45 percent of the new company, to be named Glencore Xstrata International.
SURGE IN DEMAND
Bringing together Xstrata, the world's fourth-biggest diversified miner, and Glencore will create a group hoping to reap the reward of growing demand for commodities from China and other emerging nations.
Competition authorities are expected to have a hard look at the combined company, which will hold a big sway over markets like thermal coal, copper, zinc and ferrochrome.
Many governments may take the opportunity to review Glenstrata's influence on their food and industrial and energy imports and exports so ... it might be forced to relinquish some of its other roles, said Neil Dwane, chief investment officer of RCM, a unit of Allianz Global Investors, an Xstrata shareholder.
Davis was confident of antitrust approval, saying authorities in the past have always treated the two companies as one unit due to their close ties.
The combined group expects synergies of at least $500 million and to boost earnings to Xstrata shareholders in its first full financial year.
This is a natural merger which will realize immediate and ongoing value from marketing the combined group's products to maximize arbitrage opportunities, blending, swapping and storing to meet customer needs more exactly, Glasenberg said.
The new group will be the world's biggest exporter of coal for power plants, top integrated zinc producer and would have had revenues of $209 billion and adjusted core profit of $16.2 billion had they been together during 2011.
The size of the deal surpasses Rio Tinto's $38 billion takeover of Alcan in 2007.
Xstrata shares fell 2.8 percent while Glencore rose 1.0 percent in early trading Tuesday compared to a 1.6 percent fall in the sector.
($1 = 0.6331 British pounds)
(Additional reporting by Sinead Cruise, Chris Vellacott, Victoria Howley, Editing by Chris Wickham and Elizabeth Piper)