With a mighty $61bn bound, Glencore gets set to enter the FTSE 100
The secretive Swiss commodities trader will come under close scrutiny as it floats with up to 1.25 billion shares this month
Sunday 08 May 2011
As commodity prices become more volatile, it might not seem the best time to float a business that trades raw goods from aluminium to corn.
But Glencore International is speeding like a juggernaut to a London and Hong Kong listing later this month that is expected to value the Swiss-based commodities specialist at around $61bn. This defies the many critics who thought Glencore's undisclosed – but oft-leaked – valuation of $60bn was beyond reach.
The chief executive, Ivan Glasenberg, has spent months reassuring nervy investors that his secretive company would be an open member of the FTSE 100. His team met and answered the questions of City editors from national newspapers and is now on an investor roadshow armed with a minutely detailed 1,637-page flotation prospectus.
Up to 1.25 billion shares will fully trade from 24 May, and Glencore will be only the third company in history – after telecoms giant BT and energy group BG – to be fast-tracked into the FTSE 100 on its first day on the London Stock Exchange.
Glasenberg, and his outspoken chairman, Simon Murray, will come under all sorts of scrutiny post-float. Owning nearly 16 per cent of the company, Glasenberg will be a regular fixture of the Forbes rich list, with a paper fortune approaching $10bn.
Not too shabby for a company that a year ago was writen about only by mining reporters. If Glencore received any mainstream references, it was because the company was founded by former fugitive US financier Marc Rich – though he left in 1994 (see box).
One risk of being suddenly so open about a business that few had previously understood, is that it raises so many questions. Few realised, for instance, how dominant Glencore is in the many markets where it operates. This could cause problems when the trader goes on the acquisition trail.
What Glencore does
Glencore grosses $145bn a year mainly from what it calls "commodities marketing". Essentially, it acts as a merchant, buying and often transporting agricultural products, raw fuels and base metals from producers to customers. But unusually, Glencore also owns major mining assets of its own, such as the Prodeco coal operations in Colombia, and Katanga, a copper and cobalt mine in the Democratic Republic of Congo.
There are also substantial stakes in some of the world's leading miners. Glencore has a 34 per cent stake in FTSE-100 constituent Xstrata, which Glasenberg hopes to take over one day, and a minority interest in UC Rusal, the Russian aluminium giant run by billionaire oligarch Oleg Deripaska.
Through its industrial assets, Glencore directly or indirectly employs 54,800 people in 30 countries; the big-money earners are the 2,700 who work in marketing.
These highly skilled individuals don't simply match buyers and sellers, they calculate all possible risks and opportunities to maximise profits. With huge amounts of information at their fingertips, they look at virtually every disaster and how it could impact prices. The prospectus states: "Glencore also seeks to optimise around an event or an anticipated event such as unexpectedly good or bad weather conditions, transport bottlenecks or failures (for example a train derailment) or a labour or production issue as its global network alerts it to the possibility of such an event occurring or implications where such event has occurred." If that derailed train were carrying coal, Glencore could eke out supplies to the region and get top dollar for the product in the short-term.
Staff must be dedicated megabrains to respond so quickly. According to a leading mining lawyer, one of Glasenberg's reasons for floating was to ensure he retained these bright young things. Glencore's 485 traders will earn an average $103m in shares from the float. But partners will not be allowed to sell for some years, in effect tying them into the business.
Some in the City whisper that this could lead to a swathe of departures once the lock-in expires. But Glasenberg thinks the opposite: whereas before partners would leave to make their fortunes, they will now be able to sell a few shares as and when they need the cash.
The problem of dominance
The "potential risks" section of the prospectus tries to show that Glencore does not control an anti-competitive proportion of any market: "Although Glencore does not...have significant shares of the total market for commodities which it markets, further acquisitions to be made by Glencore may be subject to certain approvals (eg anti-trust approvals) which may or may not be obtained."
While technically correct, this ignores Glencore's incredible strength in the "addressable market", in essence, the real market in which it works. So, Glencore has 13 per cent of the total zinc metal market, but 60 per cent of the addressable market. The total market includes, for example, companies that transfer zinc between various parts of their organisation. The addressable market covers only the zinc that third parties, such as Glencore, might get involved with.
Mining bankers believe Glencore will have all sorts of competition issues should it try to acquire similar firms, particularly in the lead, zinc and copper markets. "Could revealing this information put an end to their M&A ambitions?" asks one banker. "If they hold some zinc back [from trading] they can genuinely move the price."
A source involved in the flotation says regulators typically look at the market as a whole and insists that Glencore "can't influence" price. Glencore has had to file anti-trust arguments in the past, he adds, and its acquisitions have been allowed through.
Some fund managers are preparing to challenge Glencore on its debt calculations. In 2010, the group's net debt stood at nearly $14.8bn, but some in the City believe that this should be closer to $30bn. Glencore advisers have argued that debt associated with trading, such as borrowings to keep metals in transit, should be treated as working capital. This is because the money has been used to buy liquid assets that could quickly be sold and turned into cash.
"This has been my big bugbear," fumes one fund manager. "The argument seems odd given the high addressable market shares in those individual commodities." In other words, as Glencore has such dominance, should it suddenly flood the market with a metal, the price would tumble. "The price they would get would then not be the price the trader sees on the computer screen," the fund manager says.
A City figure says "the proof" that these assets in transit should be included in the debt calculation comes from Xstrata's $6bn rights issue in early 2009. To maintain its stake, Glencore would have had to come up with a couple of billion dollars. Instead, it transferred coal assets over to Xstrata. Had the cash position been so strong, or if it were that easy to turn commodities into dollars, Glencore would have coughed up.
Whether this argument is correct or not, a senior banker on the flotation points out that a $61bn listing is just too big to ignore. "Every institutional investor will have to participate, even if it is just a small stake," he says. Listings worth more than the gross domestic product of Lebanon simply don't come along every day.
History Of A Giant
Marc Rich lived on the run, while laying the foundations for a worldwide trading empire
Glencore was founded as Marc Rich & Co in 1974. In the 1980s Rich was indicted in the US on charges of illegally making oil deals with Iran, and he fled to Switzerland. In 1994, he sold the company to its managers, who renamed the company. Seven years later he was pardoned by outgoing US president Bill Clinton (below).
By then, the group had already laid the foundation of the future empire in a series of acquisitions. In 1981, it bought a Dutch grain company and in 1987 a two-thirds stake in a zinc/lead mine in Peru. These buys formed the basis of Glencore's agricultural trading and industrial assets businesses respectively.
In a move that has turned out to be the key talking point of Glencore's future, it bought a stake in Sudelektra in 1990. This was a Swiss group that was changing from an infrastructure investment group to a miner. In 1999, it was renamed Xstrata, which is now a FTSE 100 miner that Glencore is likely to try to take over once the London listing has bedded down.
Ivan Glasenberg became chief executive in 2002. He is said to be extremely hard-working, effectively a 24/7 boss who has driven Glencore to revenues of around $145bn.
Four years ago, Glencore had a significant role in the creation of aluminium giant UC Rusal. The Russian group was formed out of a three-way merger, including some of Glencore's aluminium and alumina assets.
Rumours abounded that Glencore would try to float, though it is understood that Glasenberg was not always certain that this was the correct move.
However, the issuance of $2.3bn of convertible bonds in late 2009 showed that a listing was inevitable. Bondholders – China's Zijin Mining group and the US First Reserve – would have that investment turned into share stakes in the event of a listing.
Now they are among Glencore's cornerstone investors.
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