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Qatari sweetener

12 April 2012 By Una Galani

Qatar is playing merger-maker for Glencore-Xstrata. The Gulf state’s sovereign wealth fund has already proved it can act as a successful arbitrageur in M&A situations. It hasn’t revealed its intentions for the 5.5 percent stake in Xstrata built in the two months since Glencore agreed to merge with the Anglo-Swiss miner in a $90 billion deal. But the bold $2.7 billion investment could be another win.

The fund’s track record in special situations has improved. Interventions in UK retailer Sainsbury and London Stock Exchange in 2007 both backfired. But when Qatar bought 10 percent of European Goldfields last year and offered the cash-strapped miner cheap financing in return for warrants over more of the company, its interest teased out a premium bid for the entire company – and a quick buck for Qatar. The emirate is also in the money on the Volkswagen shares purchased when the car group was trying to marry with Porsche in 2009.

Qatar is doubtless betting that Glencore will raise its offer for Xstrata. Institutions that hold at least 8 percent of Xstrata shares are holding out for more, and Qatar’s stake potentially gives these naysayers more leverage over Glencore to bump up the terms. The deal can be blocked by just 16 percent of Xstrata shareholders because Glencore can’t vote its own 34 stake when the deal is put to a scheme of arrangement. Qatari opposition would almost certainly kill the deal.

In reality, the situation is more probably nuanced. Qatar wouldn’t want to get a reputation for being difficult by voting down a deal. Equally, Glencore would doubtless be keen to get it on board as a supportive long-term investor.

Qatar may have paid an average price of 1,144 pence per share for its stake, based on the average price of Xstrata shares in the last two months. Xstrata shares currently trade at 1,098 pence. But if Glencore ups its proposed share exchange ratio only to 2.9 from the current 2.8, Qatar could be more than made whole at current share prices.

Even if Glencore sticks to its offer, Qatar won’t lose much. It has a long-term strategic interest in the mining sector. And at the very least, Qatar would have the satisfaction of owning a stake in “Glenstrata” for less than the price paid by Abu Dhabi when it bought into Glencore’s float last year.


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