LONDON (Reuters) - Heightened emotions over executive pay are likely to hang over Glencore (GLEN.L) and Xstrata XTA.L bosses' last ditch meetings with key investors, raising tensions in the last weeks before a July vote on the trader's $30 billion takeover bid.
Top executives from both sides are trying to convince recalcitrant Xstrata shareholders to back not just the deal, but also an unpopular retention package worth more than 170 million pounds ($265 million) for the miner's top 73 managers - a team whose operational expertise they say is key to future profit.
A revolt at advertising agency WPP (WPP.L) on Wednesday where investors rejected boss Martin Sorrell's 6.8 million pound pay award amid a broader "shareholder spring" that has claimed top executive scalps, has made the two companies' task tougher.
"Given WPP, I think we have to take the risk of shareholder resistance seriously," said one hedge fund adviser. "If someone is against the pay, they will also vote against the deal."
Sources familiar with the matter said insiders on both sides were unsettled over the unprecedented backlash over pay, even by standards familiar to Xstrata given chief executive Mick Davis has long been one of the most highly paid in the FTSE 100.
"It is extremely hard for us, as institutional shareholders, to vote for retention packages like that because, in the current environment, it does look fairly egregious," said one top-50 Xstrata shareholder.
"The way that they have done it is such that you cannot vote against those proposals without voting against the deal, which I think is a very dangerous way of structuring the thing ... I think it will be really close."
Ultimately, most analysts and sources involved in the transaction still say dealmakers on both sides are expected to get the deal across the finish line, but it could be tight.
Key to growing concerns is the fact investors will have to back both the deal and pay in linked votes on July 12. Glencore, which already owns almost 34 percent of the miner, cannot vote.
In a scenario that would have been excluded only weeks ago, securing success could even involve a change to the terms.
Glencore - which would take a hit to its dealmaking reputation and which analysts say could face credit rating downgrades should the deal fail - has until the end of June should it want to change the bid. It could make changes up until two days before the vote, but that would then be delayed.
But two factors have played in Glencore's favor - deteriorating commodity prices, particularly for thermal coal, that have tempered expectations, and the threat of a sharp drop in Xstrata shares if the deal fails - a prospect that has seen naysayers selling out rather than holding on to vote "no".
"The apparent lack of science behind the figures and the fact the retention payment plan isn't tied to performance has stirred up some questions over whether this pay package vote might face stiffer resistance than one would have thought a few weeks ago," analyst Jeff Largey at Macquarie in London said.
"I agree there is more speculation as to whether getting the deal through will be as easy as they thought, but at the end of the day I believe the deal will still go through."
Naysayers among Xstrata investors, he said, were unlikely to hold on to their shares only to vote down the deal and face a drop some analysts estimate at 30 percent or more if the deal fails. Glencore, meanwhile, would remain a blocking shareholder.
Standard Life, Fidelity and BlackRock are among the large shareholders who have sold shares this month, according to regulatory filings.
"If I was to get my wish and Glencore walked away, the immediate consequence would be that I would be a lot poorer as the shares would go down," said one former shareholder who has sold out in recent weeks.
The structure of the offer has made minority investors key - opposition from just over 16.5 percent of the total shareholding could sink the deal, given approval is required from 75 percent for the main vote on the offer, and Glencore does not vote.
The vote on pay requires a simple majority, but both will need to go through for the deal to succeed.
Qatar, which has built an 11 percent stake in Xstrata since the deal was announced, is expected to support the bid. But several large, institutional investors including Standard Life, Fidelity and Schroders are expected to vote against.
The question, still unclear, is whether their opposition will be enough in a market that has helped temper expectations of improved terms, with thermal coal prices at two-year lows and growing political uncertainty in Argentina and Peru, two key geographies for Xstrata's growth pipeline.
Shares in Xstrata were trading on Thursday at around 2012 lows. They are also close to the lowest ratio to Glencore shares since the deal was announced - under 2.6 times and well below the offer of 2.8 Glencore shares for every Xstrata share held - implying there is little market hope of a bump.
"Clearly people in the market are upset about the retention awards, the fact they are not performance based and they are mostly cash not equity, but I am not convinced the retention awards alone are enough for the deal not to go through," analyst Christopher LaFemina at Jefferies said.
"For both companies it is an important transaction, but it is not an easy one."
Additional reporting by Victoria Howley; Editing by Jon Loades-Carter