Glencore goes public with US$11B IPO

Before early May’s commodities rout, Glencore International was expected to fetch a valuation of as much as US$70 billion, but the metal-trading king’s imminent move into the public markets will still come with a hefty valuation of US$61 billion.

Glencore’s US$11-billion initial public offering of shares in London and Hong Kong has been met with healthy demand, as the offering was covered on the first day of a two-week book build. The price range for the offer is set at 480 to 580 pence, with a final price to be determined on May 19.

Some onlookers have opined that Glencore’s owners timed the IPO to cash in on the commodity cycle at its peak, but a less cynical outlook would take notice of the company’s shifting revenue sources and the heavier capital requirements such a shift will demand. 

A look at Glencore’s recently released prospectus shows a company that is moving towards generating more of its profits from mining and less from its traditional business of commodities trading. 

Operating profits from its marketing arm – which trades everything from soybeans to oil – was US$2.4 billion last year, compared with US$2 billion from mining and other industrial activities.

But Citigroup, Morgan Stanley and several other members of the syndicate behind the IPO say that, going forward, the balance will tilt towards mining. By 2012, Morgan Stanley expects Glencore to be generating US$4 billion in operating profits from mining alone, compared to US$3.8 billion from trading. An additional US$1.6 billion in profits is expected to come from its oil and agricultural assets.

Those numbers will also continue to be boosted by consolidated profits from its 34.5% stake in base metals miner Xstrata (XTA-L), which amounted to US$1.7 billion last year.

Reflecting its renewed emphasis on mining, Glencore says that US$5 billion of the IPO’s proceeds will be earmarked for capital expenditure over the next three years while US$2.2 billion will go towards increasing its stake in miner Kazzinc, of which Glencore already owns 50.7%.

Zug, Switzerland-based Glencore currently has strong mining positions in Kazakhstan, the Democratic Republic of the Congo and Colombia – not exactly the types of regions that corporations bothered by political risk would flock to. 

But Glencore has a long history of successfully doing business where others fear to tread, even if that policy landed its predecessor company on the wrong side of the law. 

Founded in 1974 as Marc Rich + Co AG, the company was renamed Glencore International in 1994 after Rich sold his share to senior traders at the firm.

Rich, whose Jewish family fled to the U.S. from Belgium in 1941 to escape the Nazis, was a wanted man in the U.S. during the 1990s after being convicted of tax evasion and illegally trading oil with Iran during the 1970s Iranian hostage crisis. Rich lived freely in Switzerland, but was unable to return to the U.S. until Bill Clinton pardoned him in 2001, in the final hours of his presidential term.

Today, part of Glencore’s empire is a 74% stake in DRC-focused Katanga Mining (KAT-T), which is on track to produce 300,000 tonnes of copper a year by 2015. 

The deal to win that Katanga position exemplifies Glencore’s knack for making opportunistic, low-priced acquisitions.

In January 2008 Katanga merged with Nikanor, which held ground adjacent to Katanga’s in a deal that Glencore, an investor in both companies, helped to broker.

Shortly afterwards, however, Katanga was stung by the financial crisis and was only saved from insolvency by a US$265-million convertible loan from Glencore – the conversion of that debt translated into Glencore’s current controlling interest.  

Considering that Equinox Minerals (EQN-T), a company with fewer copper tonnes in the ground than Katanga, was valued at US$7.6 billion in a takeover bid last month, the majority stake for Katanga for US$265 million shows just how shrewd of a deal maker Glencore can be.

But Glencore’s going public is expected to bring some challenges to a company whose corporate culture has thrived away from the scrutiny of regulators and a multitude of investors.

Helping to ease the transition, however, will be a cash windfall for some of the senior traders who currently own the company. Glencore’s chief executive Ivan Glasenberg has a 15% stake in the company that will likely be worth US$9.6 billion. At least four others at Glencore will also become billionaires via the transaction, though none of the group of current owners will be able to sell shares during the first five years of public trading.

As part of its IPO preparations, the company appointed Simon Murray as its non-executive chairman. Murray is currently the executive chairman of General Enterprise Management Services International and a former managing director of Hutchison Whampoa. He is also a veteran of the French Foreign Legion.

Glencore’s new chairman wasted little time in generating controversy for a company known to shy away from media attention.

“Why tell everybody you’ve got to have X number of women in the boardroom?” Murray told The Telegraph. “Women are quite as intelligent as men. They have a tendency not to be so involved quite often and they’re not so ambitious in business as men because they’ve better things to do. Quite often they like bringing up their children and all sorts of other things.”

He continued: “All these things have unintended consequences. Pregnant ladies have nine months off. Do you think that means that when I rush out, what I’m absolutely desperate to have is young women who are about to get married in my company, and that I really need them on board because I know they’re going to get pregnant and they’re going to go off for nine months?”

Five other non-executive director positions were announced as well, one of whom, Peter Coates, is connected to Glencore’s current management, as he recently served as chairman of Minara Resources (MRE-A), which is majority owned by Glencore.

Best practices in corporate governance call for a majority of the board members to be independent from management.

The most recognizable name on the new Glencore board is Tony Hayward, who made plenty of headlines when he was the head of BP (BP-N, BP-L) during last year’s  Deepwater Horizon oil spill in the Gulf of Mexico.