Qatar's Sainsbury's deal left on the shelf

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.

A number of market experts took a dim view of the QIA's decision to baulk at Sainsbury's final demand and the UK's Guardian newspaper described its late pull-out as 'amateurish'.

Looking positive longer-term

But the QIA, despite its well-publicised near-misses and failures, has still made some very significant headway in recent weeks and this can easily get lost in a sea of negative headlines.

Although the sovereign investment fund missed out to Borse Dubai on Nasdaq's LSE holding, the QIA stayed positive and snared a hefty 20 per cent shareholding on the open market instead. It also managed to grab a very significant 10 per cent stake in the sought-after OMX, quite possibly to Dubai's frustration.

Indeed, recent rumours have suggested that Borse Dubai and the QIA might undertake a share swap with Qatar receiving Dubai's LSE holding in exchange for those OMX shares. Borse Dubai and Nasdaq were concerned enough by the QIA's emergence as a sizeable shareholder in OMX that they increased their offer for the Swedish firm by a cool $900m to $4.9bn to head off any possible takeover ideas materialising in Doha.

The QIA also, of course, still holds the largest shareholding in the UK's third largest supermarket chain - Sainsbury's. The dust will have to settle on the proceedings of the last few months but there is no doubt the QIA will ultimately decide the future direction of Sainsbury's ownership and who is to say that another takeover bid won't appear on the horizon at some point in the future.

One must remember just how deep Qatar's pockets are and energy prices seem to be soaring off the scale right now, adding to the riches of the Gulf states.

A recent study by the Standard Chartered Bank predicted that the QIA would double its assets to $120bn within the next three years and that will mean some pretty hefty acquisitions will be just around the corner. Qatar will be hoping its Sainsbury's misadventure was merely one step back before two steps forwards.



See also:
Supermarkets and stock markets attract the QIA
Qatar teams up with the UAE
The QIA is getting hungry for acquisitions
$4bn Dubai bid for OMX part of a wider financial vision