Qatar, the second-largest shareholder in Xstrata, said yesterday it was “firm” in its demand for an improved offer for the mining group from commodities trading giant Glencore, raising the prospect of a stalemate in negotiations between Xstrata’s two biggest shareholders.

Glencore, Xstrata’s top shareholder with an almost 34% stake, is offering 2.8 new shares for every Xstrata share it does not already hold, in a $ 26bn all-paper bid.
Qatar - whose sovereign wealth fund has built up an 11% stake in Xstrata since the offer was announced in February - is demanding an improved ratio of 3.25.

“I cannot talk about it because it’s under negotiation now, but what I can say is our position is firm,” HE the Prime Minister and Foreign Minister Sheikh Hamad bin Jassim bin Jabor al-Thani, who is also chairman of Qatar Holding, said on the sidelines of a London event.

“We look after Xstrata and all the shareholders of Xstrata, and we think it’s good to merge the two companies. It will be positive for both sides, but at the right price.”
The Prime Minister - in London for the inauguration of the city’s dramatic Shard Tower, - declined to comment further.

Qatar has held shares in Xstrata since January last year but has been building its position aggressively since the Glencore takeover was announced.

Qatar surprised the market last week after months of silence, with a rare demand for an improved offer.

Glencore, led by chief executive Ivan Glasenberg, and Qatar’s representatives have already held talks and more are due, but sources involved in the negotiations said yesterday there was little sign of either party yielding.

“Ivan is still sticking to his original negotiating position, he will not overpay and he thinks 2.8 is the right price,” one of the sources said.

“It is not looking like we are going to get a short-term resolution on this and there are no indications yet (that) the Qataris will move.”

The structure of the merger - for which Glencore will not be able to vote its shares and which requires a 75% acceptance from voting shareholders - means shareholders representing just 16.5% of Xstrata’s total shareholding could block the offer, effectively handing Qatar a blocking minority.

If Qatar refuses to back the deal and Glencore does not give ground, the tie-up would be put on ice for this year at least - an outcome that has risks for all sides, analysts and sources familiar with the matter say.

Both Glencore and Qatar are still working towards a tie-up, however, and several sources said it was still too soon to say they had decided to shelve the deal.

“It is important for both of these companies for the merger to happen, but the question is who is willing to be flexible,” analyst Chris LaFemina at Jefferies said. “Part of the problem is we don’t know how flexible each side is willing to be. Who is going to blink first?”

Neither Glencore nor Qatar, which focuses on long term investments, is likely to be rushed into a deal, but talks are unlikely to drag, several sources involved with the deal said.

“The longer this drags on, the better for the Qataris. They are long-term investors, can raise their stake and other powerful shareholders may align behind them,” one of the sources said.

“For Glencore it is now or never, the Qataris can only get stronger and harden their stance.”

If the long-awaited deal fails, for now at least, analysts say there is short-term downside for Xstrata, whose shares are currently trading at a significant premium to those of its rivals. Xstrata’s outlook has also been hit by falling prices for thermal coal, a key contributor to profits.

But, analysts and industry sources say, there is also downside for Glencore. The trader is not immune to weaker commodity prices and could also be hit by a downgrade to its credit rating, currently two notches above junk.

Moody’s warned in March, at the time of Glencore’s acquisition of grain trader Viterra, that it could downgrade Glencore to Baa3 from Baa2 if the merger with Xstrata failed.
“There is a bit of a pattern there of a more aggressive acquisition path and that would give us pause for thought,” Moody’s analyst Olivier Beroud told Reuters yesterday, though he also added Glencore would fight to keep its current rating and had already refinanced a large slice of its debt.

“To an extent, Glencore depends on its ratings to have access to funding and to reduce funding costs,” Beroud said. “They are quite a determined team, in terms of keeping the rating where it is, and they would be less comfortable at the Baa3 level, which is one notch above (junk).”