London gets ready for giant Glencore

By Alex Brummer, April 14, 2011

The upcoming London and Hong Kong initial public offering (IPO) of the secretive global commodities, mining and production group Glencore International AG, will be one of the most fascinating of modern times. In size terms alone it will be the biggest ever flotation on the London Stock Exchange (LSE) raising up to $11 billion of new cash and valuing the whole group at around $45 billion. Glencore, which is the successor company to the controversial Swiss-based commodities group Marc Rich & Co, has a highly unusual partnership-style management structure. The public quotation will allow the partners the opportunity to cash-out at a market price for the first time. It will also give Glencore the paper currency it may need if it wants to go on the expansion or acquisition trail. Ahead of the flotation there has been much speculation as to whether Glencore would achieve its stock market quotation through a merger with Mick Davis's Xstrata in which it holds a 39 per cent stake. Relations between Glencore and Xstrata have been close. Mick Davis, chairman of the UJIA, is a protégé of Glencore's top executive Ivan Glasenberg. In the wake of the 2007-08 financial crisis, when Xstrata was under pressure to reduce the debt it had built up through acquisitions, the two companies completed an asset swap of Columbia mining assets, which helped support Xstrata. Observers have compared the proposed flotation of Glencore to that of investment bankers Goldman Sachs in 1999 - the last major partnership to come to the market. The Goldman float valued the New York broker-dealer at $16 billion. Split among the 221 partners, it valued their stakes at $72 million each. Glencore's offering will be even richer. If, as expected the issue places a value of $60 billion on Glencore, then the stakes of each of its partners would be worth an average of $120 million each. Although one imagines that Glasenberg, who has already reportedly given away $100 million of his fortune to charitable causes - several of the them Jewish - has a much bigger stake. The riches at Glencore have been making the headlines. It has been reported that in 2010, the group paid its staff $146 million with $938 million extra paid out in bonuses. The bonuses are understood to have been shared among a key group of 65 or so executives and traders, which means the average pay out would have been $14 million. Such sums would place even some of the top investment banks in the shade. One of the concerns around the IPO is that because it releases so much capital, key executives and traders might see it as a chance to cut and run, undermining what has been a remarkably successful business model. A flotation on the scale of Glencore does not just happen. The preparatory work has been underway for months but there has been a recognition that market conditions have to be absolutely write for a IPO on this scale. The combination of the upheaval across North Africa and the Middle East, and the triple tragedy of earthquake, tsunami and nuclear meltdown in Japan, were not ideal for such a large IPO. In keeping with recent practice, it is seeking to make the group of advisers on the transaction as wide as possible. The offer will be managed by a core group of banks: Morgan Stanley, Citigroup and Credit Suisse, with plans to extend the list to include Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Societe Generale and UBS. The purpose of including such a wide group of advisers is to ensure the maximum distribution of the issue among global investors. Glasenberg, who is previously all but unknown in the analytical community, has also been engaged in a series of private meetings with 'sell-side' analysts to ensure a better understanding of the group's business among institutional investors. In recent years, the London market has become a magnet for overseas mining stocks from Chile to Kazakhstan. Indeed, the LSE is seeking to consolidate this expertise through its merger with the Toronto Stock Exchange (TSE) - another mining and natural resource dominated market. A potential stumbling block for Glencore is its global reach and its history. It has been alleged in the United States that it has dealt with a number of questionable regimes over the decades, including apartheid South Africa, Iran and Iraq in the days of Saddam Hussein. As is the case with many other mining groups, some of them already quoted on the LSE, there have been allegations of environmental infringements in several countries. Going public will allow Glencore's executives and traders to cash-out part of their holdings and enjoy the fruits of the group's success. But it will also bring with it new obligations including improved financial disclosure and greater focus on corporate responsibility around the world. In the end, the reception of the float will partly depend on whether global investors trust a board strengthened with independent directors and the quality of the company's post-IPO governance.

Alex Brummer is City Editor of the Daily Mail

Last updated: 11:28am, April 14 2011