Qatar Takes Unusual Role in Glencore-Xstrata Deal

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DOHA (Zawya Dow Jones)-- The decision by Qatar Holding to oppose the terms of Glencore International PLC's merger with Xstrata marks an unusual shift to an activist shareholder role for the oil-rich sovereign wealth fund.

In a surprise announcement late Tuesday, Qatar Holding urged Glencore to sweeten the terms for its proposed merger to 3.25 of its shares per Xstrata share, rather than the 2.8 on offer. The Gulf state, which is Xstrata's second largest shareholder, says it still supports the proposed merger that would create and mining powerhouse with a market capitalization of about $56 billion.

Analysts and bankers familiar with Qatar Holding said it's the first time the sovereign wealth fund has taken such an activist role as an investor. It marks a break with the traditional investing strategy of the Qataris and other oil-rich sovereign wealth funds, which normally take a deliberately back-seat role in order to avoid provoking political opposition in the countries in which they invest.

The Abu Dhabi Investment Authority and the Kuwait Investment Authority, for example, usually abstain from exercising voting rights in the companies in which they invest.

In recent months, Qatar has stepped up its investments in large European companies, using its vast gas wealth to accumulate a growing list of minority stakes in firms like Total SA (TOT), Royal Dutch Shell PLC (RDSA) and Siemens AG (SI).

By opposing the terms of the Glencore-Xstrata merger "they are trying to be like any other investor -- it just happens their capital is sovereign," said Rachel Ziemba, an analyst at Roubini Economics in London who follows sovereign wealth funds. "They're trying to get the most value and improve their return."

The move puts pressure on commodities trader Glencore to improve its terms for the merger, while also raising the specter of the deal collapsing if just over 16% of Xstrata shareholders vote against the deal. Qatar is effectively joining forces with other Xstrata shareholders such as Fidelity, Standard Life Investments and Schroder Investment Management who have said the current merger terms undervalues Xstrata. The three investment funds own nearly 3% of Xstrata, while Qatar holds close to 11%.

But some bankers and analysts played down the likelihood of Qatar adopting an activist role with its other shareholdings, saying the fund sees an unusual opportunity to maximize the return on its investment with Xstrata. Qatar Holding lacks the management expertise to wield influence in a large number of overseas companies, they said.

The wealthy emirate, which has invested heavily in the broader commodities sector this year, has been steadily building its stake in Xstrata over recent weeks.

"It's rational and logical step by Qatar," said one banker close to the fund, who asked not to be identified. "If you go shopping, you ask for a discount."

Another banker with knowledge of Qatar Holding said it was unlikely Qatar would block the deal if Glencore didn't agree to its 3.25 share ratio recommendation, with the Gulf state probably happy to back a compromise offer of three Glencore shares for every one of Xstrata's.

"I suspect this is posturing and that they'll reach some kind of compromise in the middle," said this banker.

A collapse of the deal would likely hit Xstrata's share price, which would be damaging for the Anglo-Swiss miner's shareholders and for Qatar, suggesting a compromise is likely.

"It would make Qatar look silly and they would want to avoid that," said the banker if the merger falls apart. "If anything Glencore has got the least to lose; they just walk away, but Xstrata's share price could tank for period of time and who suffers from that?"

-By Alex Delmar-Morgan, Dow Jones Newswires; [phone]; [e-mail]