Commodities giant Glencore is being held to ransom by Qatar Holding, after the Qatari sovereign wealth fund demanded a major increase to Glencore's bid price for the rest of Xstrata.
Glencore offered the Qatar sovereign wealth fund £16.9bn ($26.4bn) for the rest of Xstrata but Qatar has thrown the $65bn deal into doubt after it released a statement demanding better terms, despite agreeing to an offer previously.
Qatar wants the offer raised to 3.25 Glencore shares for each of Xstrata's. This is a big change from the existing offer of 2.8 Glencore shares for each of Xstrata's.
This gap between the current deal terms and Qatar's new demands suggests that the deal will be put on ice, as the two companies will have to substantially renegotiate it.
Meanwhile, Glencore is also underfire for retention payments. The group announced it is considering a proposal from Xstrata to amend management incentives linked to the deal that would include a £29m payment over three years to Mick Davis, the mining group's chief executive, to rescue the deal.
Leading fund managers and minority shareholders, such as Standard Life, Schroders and Fidelity, have hit back at the retention payments and the share exchange ratio this month.
Shares in Glencore are pulling down the FTSE 100 with a near 4 percent decline in prices at 292.35p as of 0845 GMT.
Xstrata stocks are also slightly to the downside at -1.60 percent at 772.60p, after investor concerns over a stalemate or abandoned deal could be on the cards.
A Deal Close to Collapse
The move could be a devastating blow to the widely watched Glencore / Xstrata bid that has seven investment banks advising on the deal.
Xstrata shareholders are scheduled to vote on the merger and proposed retention payments on July 12 this year.
Qatar has quietly built an 11 percent stake in Xstrata since February this year, which now amounts to $4.3bn.
Qatar had 66.6m shares on the day Glencore announced it was considering an offer for Xstrata, on February 2 this year.
Since then, Qatar Holding bought nearly five times as many shares in Xstrata, with derivatives and options, which boosted its stake to 10.98 percent, worth 311 million shares.
The Qatari sovereign wealth fund's role is vital for the Glencore / Xstrata merger as Glencore's bid needs 75 percent approval from shareholders in Xstrata.
This, however, excludes Glencore's 34 percent holding in Xstrata.
Standard Life and Schroders, which hold 2.9 percent of Xstrata between them, have already voiced dissent and will vote against the deal going ahead if Glencore doesn't boost its all-stock agreement.
Arguments over Retention Payments
As part of the merger, shareholders will have to vote on proposed retention payments for a number of executives.
During the deal process, Xstrata non-executive directors insisted on retention packages, which totalled £173m for 73 senior employees, saying that it was crucial to keep the miner's core team in place.
Shareholders have voiced outrage at the proposal and a leading investor representative group, the Association for British Insurers (ABI) issued its highest alert over the planned merger between Xstrata and Glencore because of the proposed remuneration deal for executives.
The ABI, which represents around a fifth of investments on the London Stock Exchange, has placed a "red top" warning to shareholders on mining company Xstrata, signifying a "breach of our principles", because a retention package for executives under the merger is not linked to performance and will be on top of their existing remuneration.
A spokeswoman for ABI told International Business Times UK that the red top warning is simply to flag up the issue with shareholders, rather than advising them which way to vote on the merger when they are balloted at a general meeting on 12 July.
Glencore has since announced that is considering to relook at the remuneration deal, after Xstrata amended its proposal to make the excutive pay deal to be more in tuned and linked with performance.