Some listings will always attract more attention than others, sometimes with regard to their scale, the nature of the business offering or their reputation. In May 2011, a hernia-inducing package found its way to the IC offices. This turned out to be the Glencore International prospectus, all 636 pages of it. The proposed issue was oversubscribed, over-hyped and over here. London's biggest ever initial public offering (IPO) was touted as a rare opportunity for investors to tap into the largely closed world of commodity trading, but subsequent events give credence to initial fears that the Glencore partners were always likely to be the chief beneficiaries of the listing.
At the time, we ventured that the planned IPO "could end up being the deal that marks the top of this leg of the commodity boom". In the event, the IPO was conducted when the Thomson Reuters/Jefferies CRB commodity index stood roughly at the halfway mark between its 2008 peak and the subsequent post-Lehman trough (or 3.4 per cent in advance of the four-year average). So the timing of the IPO, while certainly favourable to the Glencore partners, is unlikely to be seen as quite so auspicious where private investors are concerned, particularly given that the shares have been underwater ever since.
There's no escaping Glencore
Then again, there was no shortage of institutional support, despite a fairly wide disparity in analysts' valuations. However, within 18 months, one of the cornerstone investors - Aabar Investments (a unit of Abu Dhabi's state-owned UAE International Petroleum Investments) - had been forced to write-down around $392m (£253m) from its original $1bn investment in Glencore.
Timing aside, we at the IC were duty bound to try to make sense of the business model of the Swiss commodities trader, whose trading activities had regularly been described as "murky" or "controversial" by the financial press. After all, the $10bn (£6.6bn) envisaged to be raised on the London Stock Exchange not only meant that it was the largest ever (albeit partial) premium listed IPO, but Glencore was the first company in 25 years to enter the FTSE 100 on admission. So even if few of our readers chose to subscribe for the shares, a greater proportion would still have been exposed through tracker funds - there was no escaping Glencore, apparently.
On the face of it, there was nothing particularly convoluted about the Glencore model: three separate business segments - metals and minerals, energy products and agricultural products - in which revenues were generated both through marketing and industrial activities. Although the group had gradually built up a fairly serious portfolio of mines, farmland, storage facilities and transport infrastructure over its 40-year history, by May 2011 over 90 per cent of revenues were still derived from its marketing/trading activities. At that time, Glencore claimed to be the world's largest physical supplier of third-party sourced commodities in most of the markets it served.
A less than coherent view of the group
Presumably, that much hasn't changed, but the group has subsequently enhanced its access across a range of commodities through off-take agreements and acquisitions, culminating in this year's $65bn tie-up with Xstrata (in 1990, Glencore's precursor - Marc Rich & Co AG - became Xstrata's majority shareholder). In a sense, though, potential investors in the group are still faced with the problem of gauging the value of disparate, yet inter-connected, business strands, particularly the commodity marketing arm. Aside from the usual valuation criteria linked to subsidiaries, production volumes, free cash flows, debt and market share, analysts need to gain a degree of clarity on Glencore's marketing/trading activities before they can hope to form a coherent overview of the group.
However, comparative analysis in this area is made all the more difficult due to the fact that Glencore's principal rivals, such as Cargill, Trafigura, Koch Industries and Louis Dreyfus, are largely privately controlled entities. All of these commodity trading groups share a predilection for playing their cards rather close to their chests, and their corporate structures are notoriously complex, so meaningful comparisons are a bit hard to come by - perhaps this is where the 'murky' bit kicks in. In fact, you could even argue that price transparency is actually inimical to the interests of the big trading houses.
Some marriages are more equal than others
Glencore has always set great store by the claim that it is able to drive profits through its marketing channels, even during periods of contracting commodity prices. Although this ostensibly adds to the investment case for Glencore Xstrata, we've always had our reservations on this point, as even if one accepts its validity, who’s to say that the reverse doesn't also apply?
Nevertheless, in the wake of the merger, the combined entity does offer some compelling factors from an investment angle, including the possibility of over $500m in annual cost synergies. Group chief executive, Ivan Glasenberg, believes that the target could prove to be conservative given that it only represents synergies on the trading operations. Xstrata's management has indicated that another $300m in administration costs could be pared back on top of the trading savings - a process that would be facilitated by a re-jigged boardroom that is now heavily stacked in favour of Glencore.
The group's first post-merger annual meeting resulted in the residual Xstrata directors, including chairman Sir John Bond, being removed from the board due to the payment of loyalty bonuses that were deemed excessive. This was never going to be a merger of equals. Only two of the lead divisional jobs will be filled by Xstrata managers, with Peter Freyberg at the helm of coal mining and Mark Eames is in charge of iron ore projects.
This could conceivably lead to operational difficulties for the combined group at a time when commodity prices remain under pressure, but there are no plans to bring in any retention awards for key operating staff at Xstrata's mines - a move that wouldn't play well with minority shareholders given the scale of the loyalty bonuses dished out to Messrs Davis and Bond et al.
At large in a buyers' market
Despite plans to boost operational efficiencies, Glencore Xstrata is unique among its peers in that it is still in expansionary mode - despite anxieties about the wider resource sector. It is seeking to increase market share across a range of commodity markets in the mining and energy segments through organic growth, acquisitions (when appropriate) and a growing number of off-take agreements.
That said, the commodities group is set to carry out a detailed review of Xstrata's mining assets during the third quarter, which could conceivably lead to the sale of costly early-stage greenfield projects - the group has set a return on equity target of 20-25 per cent for new projects. It's still a buyers' market, but Glencore management is committed to canning projects that are a heavy net draw on capital (the group is already in the process of selling Xstrata's $5.2bn Las Bambas copper project in Peru, in order to satisfy Chinese regulators).
Ownership & responsibility
As stated, at the time of the original Glencore IPO, we expressed doubts over who the winners and losers were likely to be. Subsequent share performance has borne out our original misgivings, but it would be churlish to dismiss the current investment case out of hand. One point worth considering is that Ivan Glasenberg and the remaining board members control just under a quarter of the group's shares - a rarity among FTSE 100 constituents with a reasonable free-float. Notionally, if you've got a large stake in a corporation you would theoretically be less inclined to initiate reckless business decisions. The FTSE 100 miners wrote down over $70bn in capital assets over the past six years - would that have occurred if the executives had skin in the game? We think not.
