Qatar turns kingmaker in Glencore deal

Euromoney, January 2013

Much has been written about the impact on the global commodities sector of Glencore International’s proposed GBP56 billion merger with Xstrata, which at the time of writing appeared to be heading for the finish line. But in the long term, it may be remembered for a different reason: the role of a Middle East sovereign wealth fund as kingmaker in a deal that has absolutely nothing to do with that region.

Qatar’s role in the deal – which, ultimately, decided if it would go ahead or not – came about because Qatar Holding, the international arm of the Qatar Investment Authority sovereign wealth fund, holds a 12% stake in Xstrata. The Anglo-Swiss multinational mining company generally has precious little to do with the Gulf; it is the world’s largest exporter of power station coal, and QH bought in to it as part of its efforts to diversify into other commodities beyond the natural gas that underpins its turbocharged local economy. Yet without Qatar’s say-so, this deal would never have gone through.

Indeed, Qatar has been instrumental in changing the terms of the deal at least once, and probably more. Glencore had originally offered 2.8 Glencore shares per Xstrata share; at that price, Qatar Holdings opposed the deal, saying it was too low. It was principally because of that objection that the bid was increased to 3.05 shares in September.

Separately, and perhaps not always intentionally, the Qataris have had a considerable impact on the mining companies’ executives and their remuneration. One consequence of the revised bid was that Glencore insisted that its chief Ivan Glasenberg would lead the combined company, rather than Xstrata’s Mick Davis as originally planned; QH and other shareholders’ accession to this demand meant that Davis was pushed out.

Then there was the final stumbling block, controversial retention bonuses worth about GBP144 million  for a group of Xstrata employees. In November, Qatar Holding said it would vote for the deal with or without the incentives, and abstained from a third resolution focused solely on the payments for Xstrata managers. QH’s statement on this position was interesting. “QH is conscious of the sensitivities concerning governance issues in the UK and does not feel it appropriate to influence the outcome either way.”

This was, on one reading, a tacit admission of just how influential the Qatar fund has become; it was also, though, a way to ensure that the deal would go through one way or another now that QH had got the price it wanted. As a knock-on effect, though, abstaining from the remuneration vote made it more likely that the payments would be rejected, and they were, resulting in still another casualty: Sir John Bond, the former HSBC chairman, resigned as chairman of Xstrata after shareholders voted for the deal but against the retention bonuses.

One other interesting element of Qatar’s involvement in the deal is how recently it became powerful enough to have a say. It was only in April that it really began building its stake in Xstrata, passing the 5% mark that month, later passing 10% in June. Qatar has a stated interest in commodity plays outside the Middle East, but there was clearly another play at work, because QH’s building of the stake came several months after Glencore and Xstrata agreed their all-share merger in February. In short, Qatar – with its advisors, Lazard & Co – saw the deal, fought its way into it, axed it, revived it, and eventually anchored its completion while axing half the management.

None of the myriad banks involved (Citi and Morgan Stanley for Glencore, Goldman Sachs, JP Morgan, Deutsche and Nomura for Xstrata) will mind; the only hurdles left to the deal now are regulatory and it seems certain they will receive the fees commensurate with a successful completion.

“This shows us once again that the QIA is a very different animal to the other sovereign wealth funds in the Gulf,” says one fund manager. “At ADIA [Abu Dhabi Investment Authority] or the KIA [Kuwait Investment Authority] the approach is normally to have a long-held, patient and largely silent stake – like KIA in DaimlerChrysler or BP. They might well get involved in management decisions as their stake befits, but it’s behind the scenes. The QIA here is flexing its muscle as a powerbroker, and you’re going to see this again and again.”