(Adds details in paragraphs 4-13, updates share performance)
By Guillermo Parra-Bernal and Marta Nogueira
SAO PAULO/RIO DE JANEIRO, Feb 20 (Reuters) - Vale SA plans to become a company with no defined controlling shareholder as soon as possible, in a landmark step aimed at enhancing transparency and equal rights for all shareholders in the world's largest iron ore producer.
Controlling shareholders grouped under holding company Valepar SA agreed to stay together for up to three and a half more years. Under terms of that, they will present a proposal soon by which Vale will incorporate Valepar and proceed to merge the company's several classes of stock into a single, common one by November.
The existing 20-year accord governing Valepar that expires in May will be extended through November to guarantee the transition. Holders of Vale's Class A preferred shares who join the share conversion voluntarily will receive 0.9342 common stock, as part of the process.
To ensure completion of the plan, Vale would pay owners of Valepar a 10 percent premium for their shares, implying a 3 percent dilution for all shareholders. The former Valepar owners can sell the equivalent of up to 22 percent of Vale's common shares after a lock-up period starting in August expires, provided they keep a combined 20 percent by November 2020.
The change represents a milestone in a country long hobbled by corporate governance abuses and reorganizations that hampered minority investors in most cases. Reuters reported on Jan. 19 the planned to make Vale a company with dispersed share ownership and the listing of a single type of stock.
The announcement sparked a surge in common shares of Rio de Janeiro-based Vale, which touched their highest level since December 2012. Preferred shares, Vale's most widely traded class of stock, also hit their highest since January 2013.
"This represents a historical opportunity for Vale, and it's an invitation that the controlling bloc is extending to investors to join a company with the strictest governance standards," Chief Executive Officer Murilo Ferreira said at a conference to discuss the Valepar proposal.
At least 54 percent of holders of Vale's preferred shares will have to approve the conversion, whose approval is also linked to the passage of the entire proposal. Ferreira expects the company to convene a shareholder assembly to vote the entire plan around June.
"The transaction seems to be a win-win for both controlling and minority shareholders," said Rodolfo de Angele, a senior basic materials analyst with JPMorgan Securities.
People familiar with the matter told Reuters in January that Valepar members Bradespar SA and pension fund Previ Caixa de Previdência wanted a dispersed share ownership in Vale as a way to attract more investors.
Once the final accord expires in November 2020, a shareholder who owns over 25 percent of Vale will be forced to launch a buyout offering.
The partners in Valepar include Previ - currently Vale's largest shareholder, Bradespar, Japan's Mitsui & Co, an arm of state development bank BNDES, and pension funds Petros Fundação, Funcef and Fundação Cesp.
The plan could give some of those cash-strapped pension funds the possibility to cash out from Vale, whose two classes of shares have almost risen four-fold over the past 12 months.
Shares in Bradespar, which is controlled by Banco Bradesco SA, posted their biggest intraday jump ever, adding as much as 20 percent. Analysts said the accord increases the value of Bradespar's net assets while freeing it up from having to make a large cash payment to Previ for renewing the accord.
Currently, Vale's American depositary receipts trade at the equivalent of 10.5 times estimated earnings for this year, below Rio Tinto Plc's 10.7 times and BHP Billiton Plc's 15.9 times, according to Thomson Reuters data.
The implications of Monday's announcement on investor perception about Vale's governance should translate into a faster convergence of Vale and Rio Tinto share prices, Banco BTG Pactual's trading desk said in a client note, adding the move could help unleash 21 percent more value for Vale shareholders.
The plan will also help limit government interference in Vale - an aspect that weighed down the company's stock during President Dilma Rousseff's five years in office. Improved governance stemming from the move could help Vale's stock cut the valuation gap relative to global mining peers.
"It's a brutal change of governance for the company," the BTG Pactual note said.
Still, the Brazilian government will keep a so-called golden share, a legal mechanism that allows it to fend off hostile takeover attempts and shape strategic decisions, Ferreira said.
"It's a political event ... that in my view, should not impact the Vale case being discussed today," he said at the call.
The strategy replicates the move that helped put planemaker Embraer SA out of the government's control in 2006 in which the share conversion was done simultaneously with the scrapping of the planemaker's shareholder accord. The government, however, kept a golden share in Embraer.
The 3.073 billion-real ($990 million) goodwill generated by Vale's incorporation of Valepar will be split equally among all shareholders, Chief Financial Officer Luciano Siani said at the call. ($1 = 3.1035 reais) (Additional reporting by Roberto Samora, Tatiana Bautzer, Brad Haynes and Paula Arend Laier in São Paulo; Editing by Leslie Adler and James Dalgleish)