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Last Updated: Wednesday, 18 July 2007, 15:11 GMT 16:11 UK
Qatar powers towards Sainsbury's bid
By Gavin Stamp
Business reporter, BBC News

Qatari prime minister Hamad bin Jasim bin Jabir al-Thani
Qatari leaders want to flex their financial muscles abroad
Officials from the Gulf state of Qatar attending a major investment conference in London in March may have taken time out to visit the nearest Sainsbury's.

If so, they must have enjoyed the experience.

Four months later, Qatar's state investment authority, which invests the country's surplus financial resources, is considering making a 10.3bn bid for the UK's third-largest grocer through investment vehicle Delta Two.

The bid may yet not materialise - Sainsbury family shareholders are said to be sceptical about the offer amid concerns about high debt levels - but Qatar is clearly serious in its intentions.

It bought a 17% stake in Sainsbury's in April and increased that to 24% last month, putting it in a powerful position should it decide to go further.

Gas wealth

The economic power and growing financial ambition of the Gulf region have been clear for all to see in recent years.

Attention has largely focused on the United Arab Emirates and the relentless growth of Dubai as an international commercial and travel destination.

Qatar's progress has caused fewer ripples but is equally noteworthy.

It now has one of the highest levels of GDP per capita in the world, estimated at $63,000.

Qatar has had a very impressive growth record over the last few years
Randa Azar, Kuwait National Bank

This wealth is fuelled by its copious energy resources and their successful exploitation.

An Opec member, Qatar has the fourth largest supply of natural gas reserves in the world controlling about 14% of the market, and is now busy exporting these around the world.

Much of the income generated by energy sales has been channelled into developing Qatar's infrastructure and with a population of less than a million, its residents enjoy some of the highest standards of living in the region.

"Qatar has had a very impressive growth record over the last few years," says Randa Azar, chief economist for the National Bank of Kuwait, which owns one of Qatar's top banks.

"This growth is expected to continue and we believe the economy could double in size in the next five years."

Foreign appeal

But Qatar has struggled to find an outlet for its wealth at home, although it is trying to position itself as a regional financial centre, and has looked abroad to spread its riches.

"They need to diversify," explains Randa Azar, adding that Qatar does not have limitless natural resources or the skilled labour force to build industries from scratch.

"Like most other Gulf states, Qatar is looking to recycle petrodollars in investments abroad."

Qatar has assets and currency reserves worth an estimated $70bn.

Boy waving flag in Doha, capital of Qatar
The Doha skyline testifies to Qatar's wealth

With most of the country's key resources owned by the Royal family, the state-run investment authority - whose chief executive is also the country's foreign minister - has an estimated $40bn at its disposal to spend.

Initially, it confined itself to the Middle East, investing in Jordan and Lebanon.

But it has branched out, acquiring a 6% stake in French defence and media group Lagardere and being linked with a similar investment in counterpart EADS, owner of Airbus.

Yet it is the UK - which has strong historical and business links with Qatar - which has become its main focus of interest.

In the past few years, it has made a select number of acquisitions in the health and education markets, specialising in care homes for the elderly.

It met with its first setback last year, failing in an 8bn bid for Thames Water.

Buying Sainsbury's, one of the UK's largest companies and household brand names, would represent a corporate move of a totally different order.

Property lure

Despite significantly improving its performance in the past two years, Sainsbury's lies third to Tesco in the UK grocery market, one of the most competitive in the world.

Tesco has nearly twice the market share of its nearest competitor Asda, itself is owned by the world's largest and most powerful retailer Wal-Mart.

Sainsbury's store
Sainsbury's property portfolio is coveted

But despite these disadvantages, analysts believe there is huge value contained in the business, in the form of its 8.6bn property portfolio which could be exploited by a buyer.

The new offer, they suggest, reflects this.

"I think it (a deal) is more likely this time around than it has been for some time," says Richard Ratner, from stockbrokers Seymour Pierce.

Paul Taylor, who runs Delta Two, has praised Sainsbury's bosses and said the firm fits the mould of "an exceptional business" in which it is seeking to invest long-term.

But Delta Two's plan to borrow more than 7bn to fund the deal is bound to cause concerns among Sainsbury's staff about the long-term future of the business and the state of their pension schemes.

Sainsbury's most recent association with the Middle East was an unhappy one, ending its short-lived and loss-making investment in Egypt in 2001 after only two years.

Qatar will have to persuade shareholders that the next experience will be a better one.

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