Saturday, September 08, 2012

The Qatari Sovereign Wealth Fund and Sovereign Investing (SWF Activism Continued)

The principal focus of sovereign wealth fund inquiry tends to the more transparent funds, and those whose interests are geared toward portfolio investment. (e.g., Considering Fabio Bassan's New Book: The Law of Sovereign Wealth Funds). This is certainly an important project.  But sovereign investing through SWFs is also taking another turn, especially, it seems, by the less transparent (and harder to study) SWFs.  These may be moving aggressively toward another model of sovereign investing, one in which the conflation of state and private actors becomes more confused and where the lines between sovereign state, national sovereign, sovereign funds, private enterprise and public actors becomes more cloudy.

(Pix from Qatar in the spotlight over Glenstrata activism, Financial Times, July 1, 2012 ("Qatar's new-found activist approach to the $58bn merger of Xstrata and Glencore has further distanced Qatar Holding from its regional sovereign wealth fund peers and placed it firmly in the spotlight.") full story HERE)

This is nicely illustrated by recent activity of the Qatari SWF though Qatar Holdings LLC "a global investment house established in 2006, founded by the Qatar Investment Authority [which] invests internationally and locally in strategic private and public equity as well as in other direct investments." I have written about the Qatar Holdings more aggressive stance in the battle over control over Xstrata in a prior post.  (e.g., Sovereign Wealth Funds Get More Aggressive).  That battle continues.  This post includes  an update of that battle for control, and the Qatari role in  it (Clara Ferreira-Marques and Emma Farge, Glencore raises offer for Xstrata to salvage deal, Yahoo Finance (Sept. 7, 2012)) and a short assessment of its consequences.

Clara Ferreira-Marques and Emma Farge, Glencore raises offer for Xstrata to salvage deal, Yahoo Finance (Sept. 7, 2012).

LONDON/ZUG, Switzerland (Reuters) - Trader Glencore has raised its offer for miner Xstrata in a last-ditch attempt to rescue one of the sector's largest ever deals, after months of opposition from Qatar's sovereign wealth fund and other shareholders.

After early excitement in the market on Friday, however, it remained unclear whether the revised proposal would succeed.

Xstrata's independent directors issued a strongly worded statement questioning its structure, and sources familiar with the matter said Qatar could oppose major elements of what is still only an indicative deal.

Glencore's Chief Executive Ivan Glasenberg appeared to have broken an impasse between Xstrata's two biggest investors - who had not talked to each other for two months - after overnight talks in London.

The meeting, attended by Glasenberg, Qatari prime minister Sheikh Hamad bin Jassim al-Thani and former British prime minister Tony Blair - who has had a role in facilitating the deal - put the takeover now worth $36 billion back on the table.

Xstrata shareholders had been due to vote on the original $34 billion bid on Friday, with a rejection widely expected. But Glencore, already Xstrata's biggest shareholder with a 34 percent stake, then proposed the revised offer of 3.05 new shares for every share it does not already own, up from 2.8.

Qatar, Xstrata's second largest shareholder, had demanded a ratio of 3.25 in June, though in recent days sources involved in the deal had said the Gulf state could compromise.

. . . .

"This is going to get pretty dramatic, it's gone to all-out war," said one of the sources.

Details of the latest indicative offer - Glencore has yet to make a firm bid - were unexpected even by Qatar, several sources familiar with the matter said.

Changes in the new proposal include making Glasenberg chief executive of the new group instead of Xstrata's Mick Davis, a veteran manager with a strong operating record who would have taken the helm under the original deal with Qatari support.

The role for Davis and his team, if any, is unclear under the revised proposal, and the change could draw an end to the South African manager's career at Xstrata after a decade.

Looking tense and tired at Xstrata's shareholder meeting in Switzerland, Davis declined to comment on his plans as the vote on the deal was postponed.

Glencore also said it could change the offer's structure, from a complex arrangement that requires 75 percent approval of non-Glencore shareholders, to a straightforward takeover requiring a simple majority of Xstrata shares.

"The potential change of structure from scheme of arrangement to a takeover is significant," said one of Xstrata's largest 40 investors. "It makes forcing the deal through more likely."


Xstrata, in a statement, cited a letter from its independent directors to Glencore. This questioned the revised offer's 22 percent premium to Thursday's closing share price as "significantly lower than would be expected in a takeover". It also criticized the intention to replace Davis and to change incentives for executives to stay with the company as a "significant risk" to its operations.

Several sources said it was also not clear whether Qatar backed the management changes and the potential shift to a simple takeover. One source said Qatar felt the 3.05 ratio was not directly comparable with the 2.8 in what was now effectively a proposed takeover.

Qatar, which had not held talks with Glencore for two months before Thursday night, has not yet commented on the offer.

"My gut tells me that Ivan has played this very cleverly... He's met them halfway, declared this as a takeover and there's no clarity on whether Mick or any of his team are going to be involved," said Richard Buxton, who is head of UK equities at Schroders, one of Xstrata's top 20 shareholders.

"We would still oppose, but the Qataris are the kingmakers and it partly depends on what they do... But it will clearly affect how long we wish to remain an investor in the combined entity if it occurs on these terms."

Buxton dismissed the revised bid as "still inequitable".


Glencore's bid had been heading for the rocks after Qatar, with 12 percent of Xstrata, said it would vote down the deal unless it was improved.

. . . .

Xstrata shares ended the day up 3.6 percent at 1,014 pence, off earlier highs after hints of opposition. Glencore's were down 3.6 percent at 378 pence, which would value each Xstrata share at almost 1,152.9 pence under the new ratio, midway between Glencore's offer and Qatar's demands.

Some Xstrata investors were content with the new proposal. "I'm very satisfied with the new terms. I think we would be disappointed if we were Glencore shareholders, but we are happy because we are Xstrata," said Thomas Mitsoulis, asset manager for one shareholder.

Top-ten shareholder Standard Life also backed the proposal.

Glencore is being advised by Citigroup, Morgan Stanley, Credit Suisse and BNP Paribas. Xstrata is being advised by Deutsche Bank, JP Morgan, Goldman Sachs and Nomura, with a role also for Barclays Capital.

Both sides were advised by an independent consultant, former Citi banker Michael Klein, who shuttled between executives to broker the deal. Qatar Holding is being advised by Lazard.

(Additional reporting by Sophie Sassard, Sinead Cruise, Sarah Young, Dinesh Nair and Chris Vellacott; Editing by Andrew Callus and David Stamp)
For the most part, this is little more than a larger and more important version of the typical pattern of business combinations.  But what makes it interesting is the way in which this corporate combination serves as a site for the interaction of public and private actors.   Business week got is best:
The dramatic developments in what would be this year’s biggest merger included an evening negotiating session in a London hotel mediated by former U.K. Prime Minister Tony Blair - - between Glasenberg and Qatar’s premier, said a person with knowledge of the deal. Qatar’s sovereign wealth fund, which has been insisting on a higher price, holds a pivotal 12 percent share in Xstrata. Since 2008, Blair has been a senior adviser to JPMorgan Chase & Co., which is advising Xstrata. (Firat Kayakiran and Jesse Riseborough, Glencore-Xstrata Merger Bid Turning Into Hostile Takeover, Bloomberg/Business Week, Sept. 8, 2012).
Here we see a quintessential representative of the state (the former U.K. Prime Minister) mediating on behalf of a private banking house (as he would the disputes among state actors) between a representative of a private enterprise seeking to acquire control over another in a private market transaction, but in in which the principal negotiator is the head of government of Qatar acting on behalf of the state operating through an investment vehicle. The sovereign element of the transaction is here complicated and multi-layered.  At one level this is a state transaction, involving the political apparatus of a sovereign, at another it is a transaction involving private market power projections by a state fund that may have little in the way of sovereign purpose, on yet another this involves the interactions of public and private actors for the control and disposition of private enterprises with public consequences (for Qatar, at least), and on yet another level it is about the difficulty of distinguishing between personal and state apparatus and public and private wealth in states in which the government itself is a blend of the public (the state) and the private (the monarch), and on yet another level it is another step in the battle within host states among elites--on the one hand transactional middlemen (lawyers, bankers, brokers and the like) with an interest in facilitating and deepening relationships with SWFs irrespective of their intent or activities and on the other political actors  who view these interactions as potential threats (on this last point see, e.g.,Complex Networks: Chinese Soevereign Wealth Funds and the Western Service Sector, Law at the End of the Day, Aug. 18, 2011).

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