2nd UPDATE: Glencore Says Xstrata Has Proposed Tweaks to Retention Package

-- Glencore says Xstrata's board has proposed amendments to its incentive arrangements

-- Amendments to include performance links to cost savings and shift from cash to share payments for top executives

-- Glencore didn't comment on Qatar's call for a 16% rise in the share-swap merger ratio

-- UBS says the merger is clearly at risk while other analysts say concessions are likely in order to secure votes

(Adds details about proposed retention package tweaks in the 10th paragraph.)

By Alex MacDonald

LONDON--Glencore International PLC (GLEN.LN) said Wednesday that Xstrata PLC's (XTA.LN) board of directors has proposed tweaking the terms of its retention package linked to the global commodities' giants planned merger of equals, amid a groundswell of opposition to the propositions.

Glencore provided no details on Xstrata's proposal, nor did it comment on sovereign wealth fund Qatar Holding's surprise call for a sweetening of Glencore's offer terms for the Anglo-Swiss miner.

Glencore and Xstrata are trying to secure shareholder votes for a merger of equals that would create the world's fourth largest diversified mining company, with a market capitalization of close to $56 billion based on current share prices. The two are facing mounting opposition after Qatar, Xstrata's second largest shareholder, called for a better share-swap ratio and several large shareholders expressed concern over Xstrata's GBP173 million retention package.

Xstrata's shareholders will vote July 12 both on that package and the deal itself. A 'no' vote on either would scupper the deal, since the two are interlinked, and the possibility of the deal being struck down in its current terms has increased unless both terms are tweaked.

The "Glencore Xstrata merger [is] clearly at risk," said UBS in a note, adding that both managements have been adamant that the current terms are fair and were only agreed to after extensive negotiations. Other analysts were more sanguine, saying Glencore and Xstrata will need to make concessions in order to secure shareholder approval.

Qatar Holding, which has a near 11% stake in Xstrata, called on Glencore Tuesday to boost the proposed share-swap ratio to 3.25 Glencore shares for every Xstrata share, up 16% from the proposed 2.8 shares.

Other large investors, such as Fidelity Worldwide Investment, Standard Life Investments, and Schroder Investment Management have also said that the ratio wasn't sufficiently attractive. The three funds would bring the total number of shareholders that could potentially block the deal to nearly 14% of Xstrata's share base, based on FactSet data.

Xstrata's two-pronged shareholder vote is structured in such a way that the deal would be blocked if shareholders representing just over 16% of Xstrata's share capital vote against the deal. The deal would also be blocked if 33% of Xstrata's shareholders vote against the retention package. Glencore, which owns 34% in Xstrata, isn't allowed to take part in either vote.

Some of Xstrata's large shareholders have already expressed ire over Xstrata's hefty retention package, which would pay GBP29 million to Xstrata's Chief Executive Mick Davis over a three-year period for staying on board, with no obligation to meet performance targets.

Xstrata said the retention package was necessary in order to retain Xstrata's management but people familiar with the matter said Tuesday that a performance element would likely need to be added to win shareholder approval. Indeed, one of the people familiar with the matter said late Tuesday that Xstrata has proposed to Glencore that the payments be made in stock instead of cash and that for the senior executives they include a performance condition tied to cost savings.

Xstrata declined to comment on the proposal.

At 1045 GMT, Xstrata's shares were down 1.4% at 774 pence, while Glencore's shares were down 2.9% at 293 pence. The FTSE 350 mining index was down 1%.

-Write to Alex MacDonald at [e-mail]