The incredible shrinking merger: Glenstrata already worth $35 billion less

Knight Vinke on Tuesday became the latest major shareholder of Xstrata (LON:XTA) to voice opposition to the proposed $58 billion deal with Glencore International (LON:GLEN) if the terms of the deal – billed as a 'merger of equals' – are not improved.

The New York-based asset manager  joins Qatar's sovereign wealth fund and other institutional shareholders – bar BlackRock, the miner's top shareholder –   which want more than the 2.8 shares for every one of Xstrata that the Swiss commodity trading giant is offering. Combined these entities have enough votes to block the deal.

The Financial Times reports like Qatar, Knight Vinke is looking for a ratio of 3.25:1. The deal was pushed to the verge of collapse last week after Qatar, which owns close to 11% of Xstrata, unexpectedly opposed the deal's terms.

In a classic game of brinkmanship Glencore, following an 'emergency meeting' with the gas-rich Middle Eastern nation's representative declared that it is willing to kill the merger because a deal at a 3.25 ratio overvalues the miner.

Since the news of the bid first broke at the beginning of February, Glencore has lost 37% of its market value and is now worth $32 billion in London. Xstrata has not fared any better – it has lost $23 billion of its worth on the London Stock Exchange over the same period.

Based on a 2.8 ratio, this translates into a more than $35 billion decline in the value of the deal. The resource-heavy FTSE-100 index is down less than 3% over the same period, while the Dow Jones has eked out single digit gains.

Xstrata last week also moved to appease shareholders, announcing its planned executive retention payouts would be paid entirely in shares, rather than in cash and on top of that, the more than generous $342 million in bonuses for senior management – including the $44 million for CEO Mick Davis – would depend on the level of cost savings achieved through the merger.

Reuters reports while both Davis and Glencore CEO Ivan Glasenberg would suffer blows to their reputations as dealmakers if the merger should collapse other parties stand to lose more.

Xstrata shares – held up by the deal while other miners have been sold off – could drop between 20% – 30% handing those Xstrata shareholders currently opposing the deal nothing but a Pyrrhic victory. It could also prove damaging for Qatar, which has plonked more than $4 billion on Xstrata.

The two companies are spending a combined $200 million on advisers and legal counsel to push the deal through and a collapse would be a blow to a long list of bankers, including Citigroup, Morgan Stanley, JP Morgan and Deutsche Bank.

Apart from shareholders blocking a deal the European Union is stepping up scrutiny of the mooted merger after steelmakers and other European players "raised fears that the deal could create too powerful a player" in the market for zinc, nickel and coal.

Xstrata said it expects formal notification of the transaction from the European Commission to take place in mid to late August. The July 12 meeting to vote on the deal has been pushed back to October.

With revenues in excess of $200 billion Glenstrata, as it has been dubbed, would become the 4th largest miner on the planet with Xstrata's current management responsible for over 80% of the combined group's earnings, 150 mining and metallurgical assets and 20 major growth projects.