Shareholders in global miner Xstrata
Glencore made its long-awaited bid last week, unveiling a potentially record deal both sides believe will create a mining and trading powerhouse, and offering 2.8 of its shares for every 1 Xstrata share in issue.
The offer for the 66 percent of Xstrata Glencore does not already own is worth roughly $36 billion (22 billion pounds) at current levels.
Even though few dispute the rationale for a combination, the
headlines were almost immediately grabbed by big Xstrata shareholders wanting more.
Xstrata shares are currently trading roughly in line with the ratio proposed.
The time value of money - a convention that says money held now has a higher value than money promised in the future - along with the drop in Glencore's own price to below levels prevailing before the offer was made, both point to some hopes of a sweetener.
The number that is being touted is 3.0 and that seems a reasonable number, analyst Nik Stanojevic at Brewin Dolphin said. The fact that it has got to 2.8 tells me the market is expecting something slightly higher.
But there is a marathon ahead. Glencore itself is not due to report full results until March 5, and a circular detailing the offer is not set to be posted the following month. A vote would come weeks after that.
Any serious negotiations to boost the price are weeks or even months away, several sources involved in the deal said.
People need to get the circular document, they will continue to do their analysis between now and then, one of the sources said. It will be March or April before there is a period of active discussions.
But after a jump on the day the deal was first announced, Xstrata's shares are up less than 7 percent from their undisturbed levels, indicating there is little expectation of a white knight -- and giving Glencore time.
We are months away... God knows what happens to macro environment or even copper price by then. If copper halves between now and then Xstrata could halve, said one London-based hedge fund manager.
There is a hell of a lot of water to go under the bridge before Glencore needs to engage in any pricing discussion.
In the meantime, with little overlap among shareholders in the two companies -- unlike the 2001 merger between BHP and Billiton -- there is little to hold Xstrata's investors back from asking for more.
According to RBC analysts, some 22 percent of Xstrata shares are held by top 100 investment institutions which do not hold any Glencore stock. A further 26.7 is held by smaller shareholders, the vast majority of whom also hold only Xstrata.
This is in part because of Glencore's limited free float, and it means these shareholders at least do not care about the negative implications for Glencore of a higher offer for Xstrata.
The level of dissent could be crucial. Glencore cannot vote its own 34 percent of Xstrata for the deal, and 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.
Standard Life, a top 10 shareholder which has already said it does not back the current deal, said on Wednesday it felt there was a groundswell of opinion building against the current ratio which they say does not reflect growth potential.
I think we do have a strong voice. I think we ought to be listened to and I think we will be listened to, Euan Stirling, investment director for UK equities, told BBC radio.
Hedge funds are certainly hoping he is right.
There is record short-selling interest in Glencore, with roughly three-quarters of the shares available out on loan -- a high level even for Glencore -- as they bet the trader will be pushed to raise its offer and squeeze out more value.
In Xstrata, meanwhile, institutional exposure has dropped, with stock in institutional lending programmes down to 375 million from 575 million shares between February 1 and February 14, data from Data Explorers showed. The price, however, has not dropped accordingly, meaning others are piling in instead -- again, potentially betting on an improved offer.
If sweetened, the sources and analysts say Glencore would have to bump the ratio from 2.8 to at least 3 or above.
Based on this assessment and weighing synergies and respective benefits, we find that under the current proposal too much value would be transferred to Glencore, including control of the merged entity, at no premium, Exane BNP analysts said in a note this week.
This does not look like a proposition that Xstrata shareholders can vote for. This looks like an opening bid.
($1 = 0.6382 British pounds)
(Additional reporting by Victoria Howley; Editing by Andrew Callus)