Qatar May Block Huge Merger between Natural Resource Giants

This Friday the shareholders of Xstrata, one of the largest copper and coal mining companies in the world, will vote on a merger offer that has been submitted by Glencore International, who dominates the global market for trading such commodities.

The two firms complement each other perfectly. Glencore already controls a global trading network that controls the movements of commodities to manufacturers and governments; it earns steady, but low profits. Xstrata on the other hand owns a mining empire that stretches from Australia to Canada, and South Africa; its profits are far larger, but also prone to huge swings in commodities prices.

If successful the resulting natural resource conglomerate would have an estimated value of around $86 billion; but Qatar Holding, a unit of Qatar’s sovereign wealth fund, may well block the deal in search of better terms.

Over the last year they have invested nearly $5 billion, giving them a 12 percent share of Xstrata. Other shareholders, Norges Bank Investment Management, and Knight Vinke, have both said that they will support Qatar Holding, giving the group a combined 16 percent; enough to block any merger.

The problem is that the different parties are still negotiating the price of Xstrata’s shares. Glencore has offered to exchange 2.8 of its own shares for every Xstrata share, however Qatar want more, suggesting a ration closer to 3.25:1.

Qatar, who has billions of dollars in cash and earns vast revenues from exporting its natural gas, is quite happy to play the long game and hold out for better terms.

Ivan Glasenberg, the chief executive of Glencore, has also suggested that his company could easily abandon the deal now and return in a year or so when he believes Xstrata will be worth less. He may well have a point; the falling price of coal has seen Xstrata’s net profits fall by 33 percent so far this year, and since the deal was first announced its share price has dropped 16 percent.

Currently Xstrata’s shares are only valued at 2.4 times that of Glencore’s, meaning that Glencore are unlikely to improve on their offer, and increasing the probability that the deal will fall through.

By. Charles Kennedy of Oilprice.com