Qatar's Sainsbury's deal left on the shelf (page 1 of 2)

It hasn't been a good couple of months for the QIA.

First, it saw its plan to buy more than 30 per cent of the London Stock Exchange (LSE) from New York based exchange Nasdaq fall on its face after rival Gulf outfit, Borse Dubai, was offered most of these shares as part of a convoluted deal to acquire Swedish market operator OMX.

Now, the QIA has had to walk away from months of protracted negotiations with the UK's J Sainsbury retail chain after it seemed tantalisingly close to a $21.6bn buyout.

Feeling the credit squeeze

The QIA's careful courtship of Sainsbury's has filled many column inches on the business pages over numerous weeks but, on November 5, the deal finally blew up.

The Delta Two investment fund, which is backed by the QIA and has been negotiating the purchase, cited turmoil in the credit markets as the main reason for its decision to drop out of the acquisition.

The deal had been rumoured to be close to collapse for a while, with the largest UK union Unite throwing its hand up in the air over Qatar's long-term intentions for Sainsbury's and the firm's founding family, Sainsbury, still sizeable minority shareholders, allegedly not being in favour of the sale to the Qataris.

But ultimately it was the fall-out from the US sub-prime mortgage crisis that killed the transaction, making bank loans that much harder to come by, and more expensive to support and justify, and increasing the pressure on the QIA to cough up more hard cash.

The QIA had in fact proposed a cash element of around $7bn in the early summer when talks were beginning and global markets hadn't commenced their downward, sub-prime induced spiral.

Once it appeared that obtaining finance might prove harder, Sainsbury's shareholders naturally sought to reduce the proportion of debt in the deal and Qatar gradually upped its cash injection to close to $10bn, out of the $21.6bn overall cost.

It appears, however, that a final demand from Sainsbury's of an extra $1bn in cash to seal the deal, linked with a dispute over the future funding of the firm's pension scheme, may have been the final straw for the QIA and it subsequently instructed Delta Two to drop the bid.

Sensible or fool-hardy?

Some analysts have said the QIA has been prudent to pull out of the deal with the cost of borrowing now rising and with such a massive chunk of debt to sustain in order to finance the deal. But it is surprising that, with hydrocarbon prices presently at an all-time high and the Arab Gulf states awash with liquidity, Qatar has chosen to back out of a deal due to a comparatively minor cash adjustment.

The QIA had, to an extent, a gun to its head with regard to concluding the Sainsbury's deal as November 8 was the final deadline imposed by the UK's Takeover Panel to 'put up or shut up' and perhaps, following Sainsbury's late request for a sly extra $1bn in hard cash, the QIA's irritation was piqued.

In the wake of Qatar's decision to scrap the acquisition, Sainsbury's share price has rather predictably plummeted and the QIA, despite its failure to achieve a full takeover, is still the retail chain's largest shareholder, having accrued a 25 per cent stake over the past year.

It might be argued then that the QIA has shot itself in the foot over its obstinacy not to pay the extra sum as it has actually lost a larger amount, over $1bn, in the last few days as the share price has retreated.

The QIA is believed to have paid around 580 UK pence per share for the majority of its Sainsbury's holding but at the end of trading yesterday, Tuesday, November 6, the retail chain's stock was worth 445 UK pence a share.