INTERNATIONAL. Qatar's unexpected role as kingmaker in the biggest proposed merger of the year is an outgrowth of its new strategy to shift assets of its US$100 billion sovereign wealth fund into commodities including gold, copper and oil.
Once known for acquiring trophy investments like London’s Harrods department store, the tiny Persian Gulf kingdom first disclosed its holding in Xstrata (XTA) Plc in February, just after Glencore International Plc (GLEN) made its US$25 billion bid for the Swiss mining company.
Qatar’s 11% stake, worth US$4.1 billion, effectively controls the outcome of the deal, and illustrates its efforts to seek new leverage abroad.
“The Qataris now are in the driver’s seat,” Peter Davey, metals and mining research chief at Standard Bank Group Ltd, told Bloomberg. “Is it crucial that Qatar Holdings vote for the merger? Yes.”
Qatar flexed its muscles on June 26, asking for a 16% higher price from Glencore, based in Baar, Switzerland. The demand, which took the commodities-trading firm by surprise, according to people familiar with the situation, set off a new round of negotiations, putting in doubt a deal that would create the world’s fourth-biggest mining company.
Advisers to Glencore and Qatar met yesterday in London to discuss its opposition, the people said, which has helped push back a planned July 12 shareholder vote on the combination.
Officials at the Qatar Investment Authority, which oversees the country’s investment vehicles, declined interview requests. It is the world’s 12th biggest sovereign wealth fund, according to the Las Vegas-based SWF Institute. Qatar’s own resources include the world’s third-largest natural gas reserves.
The size of Connecticut and with a population of just 2 million, Qatar began shifting assets to natural resources this year, betting on a global surge in commodity prices, Hussain Al- Abdulla, a board member at the sovereign fund, told reporters in April.
In the same month French oil giant Total (FP) said Qatar had acquired a 3% stake, now worth US$2.4 billion. That followed a US$250 million investment in a resources fund managed by Barclays Plc, and a deal to take control of more than 150 square miles of farmland in Australia.
Its latest move came June 22, when it agreed to buy a 49% stake for about US$2 billion in the AUX gold mining business owned by Brazil’s richest man, Eike Batista. AUX mines for gold in Colombia.
Lately Qatar’s also checked out copper deposits in Mongolia and gold mining companies in Africa, according to people familiar with those situations. It recently formed a new venture focused on mining and has signed agreements for joint projects with such countries as Bulgaria and Sudan.
Qatar’s timing could be right. This month Goldman Sachs Group Inc. predicted investors in commodity companies could reap a 29% return over the next year as prices rebound for products like copper, aluminum and crude oil. Gold may rise as much as 15% to US$1,800 an ounce by the fourth quarter, according to the median of 24 analyst forecasts compiled by Bloomberg.
“We think there is structural change happening in the commodities sector and the price of commodities will keep going up,” especially in the middle of this decade as the effects of reduced spending on developing mines and infrastructure this year come through, Al-Abdulla said.
Companies including BHP Billiton Ltd. (BHP), the world’s largest mining firm, and rival Rio Tinto Plc are scaling back resource investments as project costs rise and prices for some metals soften. London-based Rio in April pulled out of plans for a US$9.2 billion port project in Australia’s Queensland state, where it mines coal, citing volatile markets.
Qatar could also be motivated by a desire to diversify away from troubled investments in the European financial sector and real estate, said Rachel Ziemba, a senior analyst at Roubini Global Economics based in London. Qatar is “heavily overweight property and financial,” she said.
It has taken 6% and 7% stakes, respectively, in Credit Suisse Group AG and Barclays Plc. (BARC) Those companies are in the doldrums, with the Swiss lender’s shares down 46% in the past year, and Barclays’ falling 17% in the same period. Qatar owns 28% of Songbird Estates Plc, which controls London’s Canary Wharf financial district. Songbird’s shares have sunk 33% in the past year.
Qatar has also sought iconic properties, including paying US$2.2 billion in 2010 for Harrods Ltd., buying the Paris St- Germain soccer club, and backing the Shard skyscraper, London’s tallest.
“There seems to have been a decision at the highest levels of the state to shift Qatar’s orientation toward commodities as it reaches the limits of its previous investment strategy,” said Kristian Coates Ulrichsen, a professor of Arab politics at the London School of Economics.
Global exposure is nothing new to Qatar, which since the late 1990s has been one of the Persian Gulf’s most outward- looking countries. Its royal family has mediated in recent crises in Lebanon and Libya, bankrolled the Doha-based Al Jazeera TV news channel and made commitments in 2011 to invest as much as US$5 billion in boosting Greece’s foundering economy.
By taking stakes in resource companies like Xstrata, said Ulrichsen, Qatar is trying to extend its influence outside its region, where it’s clashed with neighboring Saudi Arabia, and build new allies in countries where the companies are located.
Yet even a country enjoying newfound leverage faces financial limits, which is one reason many analysts expect Qatar to eventually vote for the Glencore-Xstrata merger, perhaps with a token sweetening of terms.
Were Qatar to torpedo the deal, the value of its huge Xstrata investment “would likely fall sharply,” said Jefferies Group analysts Christopher LaFemina and Seth Rosenfeld. “We continue to expect the merger to happen.”