The coming days could prove to be very significant for Doha and its international investment strategy, as a contentious $90bn merger between two global mining giants reaches its conclusion.

By 24 September, the board of Xstrata is due to announce whether it will agree to the latest offer from Glencore International. Having rejected one previous proposal, Qatar Holding, one of the largest shareholders in Xstrata, will also have to decide whether the improved price is good enough for it to support the deal too.

Qatar Holding is a subsidiary of the Qatar Investment Authority (QIA) and one of Doha’s primary overseas investment vehicles. Like other Gulf sovereign wealth funds, it has tended to play the role of a passive investor since its establishment in 2006, putting money into companies around the world, while keeping its public statements to a minimum.

Qatar’s assertive stance

With this deal, however, Qatar Holding has been unusually assertive, pushing for a higher price from Glencore and making it clear that it would vote against any deal it felt undervalued its stake. As the negotiations near their conclusion, the tactics it has adopted have prompted questions about whether this is a one-off event or whether it might mark the start of a more aggressive investment strategy by Qatar.

“It is very unusual [Qatar] Holding is being this combative,” says David Roberts, deputy director of the Rusi Qatar think-tank. “Its reputation is for being the opposite and sitting quietly on the boards of companies it invests in.”

Negotiations over the proposed merger have been going on for most of the year. Glencore, which like Xstrata is headquartered in Switzerland but listed on the London Stock Exchange, made its original approach to Xstrata in February. It already owned 34 per cent of Xstrata’s shares and wanted to merge the two companies on the basis of 2.8 Glencore shares for every Xstrata share. The deal valued Xstrata at $39.1bn and would have created a group with a total value of some $90bn. The deal had the blessing of both management teams but not, it later emerged, of all shareholders. Some objected to the price, while others were unhappy at what they saw as an overly-generous retention package for Xstrata’s senior management team. Over the course of the year, both aspects of the deal have been revised by the companies to try to win the required support from their shareholders.

The domestic demand should strengthen this year and into next year compared to what we had before

Simon Williams, HSBC Middle East

At the time the deal was first announced, Qatar Holding owned less than 3 per cent of Xstrata. Since then it has been steadily buying up more shares in the market and by late August it controlled almost 12 per cent of the mining company. That buying spree has made it the second biggest shareholder in the company after Glencore and has given it considerable influence on the outcome of the deal. At the same time, it has also been pushing for Glencore to improve its offer.

Improved terms for Xstrata

The Qatari fund first went public with its dissatisfaction over the deal in a statement it released on 26 July. “While it sees merit in a combination of the two companies, it is seeking improved merger terms,” the statement read.

In particular, it called on Glencore to offer 3.25 shares for every existing Xstrata share, a price which it said “would provide a more appropriate distribution of benefits of the merger, while properly recognising the intrinsic standalone value of Xstrata”.

On 30 August, Qatar Holding released another statement, saying that “although it continues to support the principle of a combination of Glencore with Xstrata, it has determined that it will not support the proposed merger terms”. As a result, it said that it would vote against the deal at a shareholders’ meeting that was due to be held on 7 September.

Qatar has not been alone in its opposition to the deal. Other Xstrata shareholders, including Norway’s Norges Bank, have also voiced dissent and the strength of opposition was enough to force Glencore to improve the terms of the offer in early September to 3.05 Glencore shares in return for each Xstrata share, which it described as its final offer.

In response, Xstrata’s management team has said it will give its verdict on the improved pricing of the deal by 24 September, after consultation with its major shareholders. Qatar Holding, meanwhile, says it is also “giving careful consideration” to the new offer.

Awaiting greenlight on Xstrata deal

At the time of writing, many observers expect the deal to go ahead with Doha’s support. In a widely reported research note published on 11 September, Bank of America Merrill Lynch said that Qatar has not “publicly given their consent, but we believe it unlikely that Glencore would have made a full and final offer without having sought their consent”.

“I think Qatar Holding wants the deal to go through,” says another, Doha-based analyst. “That’s why it bought the shares in Xstrata.”

If that is the case, it will be a sign that Qatar feels that it has leveraged as much as it realistically can from the deal. It will also be a qualified success for its tough negotiating and investment tactics, even if the price falls slightly short of its earlier demands.

“Qatar Holding is a long-term investor,” says Kristian Coates Ulrichsen, a research fellow at the London School of Economics. “They’re not fixated by the short-term gains. They want to ensure that they get the best out of their investment. And if they feel their shares are undervalued they’re going to hold out.

“There is an interesting phenomenon here, where you have institutional investors linked to states, who are prepared to use their shareholdings in a much more muscular way to ensure that they get what they perceive to be fair.”

The key question going forward is whether the Xstrata deal will embolden Qatar Holding, or indeed other sovereign wealth funds from the region, to repeat this tactic and become more assertive with their investment strategies. For some analysts, the circumstances of this deal are exceptional and it would be unwise to assume it will set a model for the fund’s actions in the future; not least because it may make it harder to do deals. Those looking for investment might find that the more combative approach adopted on the Xstrata deal gives them pause for thought.

“I see it as an unusual case, where there’s genuine reason and utility in being a bit more assertive and getting a better price,” says the Doha-based analyst. “I don’t think that this is part of a wider strategy of throwing their weight around. They believe they can get a better deal.

“There are many virtues to being seen as a quiet, problem-free investor. If you’re an investor who provides funding and then sits on the board and doesn’t do anything, that can win you friends in big companies and financial institutions. There is certainly a cost to being a bit more aggressive.”

The new, more activist approach, could be seen to go hand-in-hand with the more confident diplomatic tone adopted by Doha in recent years. For many years it was content to act as an arbiter in disputes in complex conflict zones such as Darfur or Lebanon. More recently, however, it has decided to try to back particular sides. Sometimes this is done explicitly, as with its military and financial support for rebel movements in Libya and Syria during the Arab Uprisings. Sometimes it is done at arm’s length, such as when it allowed the Al-Jazeera news network to make the running on its behalf with its reporting of the revolutions in Egypt and Tunisia.

Doha can only afford to do this because of its booming economy, fuelled by lucrative gas export deals, and the small local population which it needs to support.

The most recent figures from the Qatar Central Bank show that government revenues last year were even better than most observers had expected. The latest data shows that revenues in the fiscal year that ended in March 2012 grew by 42 per cent to QR220bn ($60.4bn). Expenditure over the past year was also at a record high of QR166bn, a rise of 16 per cent on the figure for the previous year. As a result, there was a fiscal surplus of QR54bn, or 8.6 per cent of GDP, higher than the 7.1 per cent given in the initial estimates and well above the 2.8 per cent recorded a year earlier.

In a research note published in late August, Qatar National Bank, the country’s largest financial institution, said that it expects to see a similar pattern for government finances this year. It is forecasting that the budget surplus will rise to QR58bn, more than twice the QR28bn that the government laid out in its budget and a new record in absolute terms.

Positive outlook

Other economists in the region share that positive outlook for the economy. “The domestic demand should strengthen this year and into next year compared to what we had before,” says Simon Williams, chief economist at HSBC Middle East. “You’ll see some acceleration in infrastructure build-out and a broadening of the service base as well. I still think Qatar has the means and the motive to push ahead with its aggressive state-led, largely publicly funded domestic investment policy.”

What this means is that Doha is continually adding to the amount it has to invest. This suggests there are likely to be plenty of deals which Qatar Holding, or other arms of the state, can choose to get involved in. Whether or not these investment funds begin to earn a reputation as tough negotiators, their ability and willingness to invest puts them among a small and much sought-after group at a time when many major economies are struggling.