Glencore unearthed

The emergence from private ownership of Glencore, the king of commodities, will send ripples through the global industry and change the notoriously secretic firm forever.

FT.com

Global, energy, commodities and resources. The in-house joke at Glencore about the origin of its name neatly captures the all-encompassing size of a business that within a matter of four decades has come to dominate the world’s raw materials markets.

The fact that the acronym is just a coincidence matters little. Privately held Glencore is the king of commodities – and surrounded by mystique. What began 36 years ago with a group of three traders, a phone book, a small flat in a Swiss town for an office and almost no money has grown into a behemoth with $106 billion in revenues and profits of $2.7 billion in 2009.

In its own words – delivered in a recent prospectus to bondholders – no one else in the business of sourcing and marketing physical commodities is "as widely diversified and as globally active”. Such claims are not restricted to company promotional literature. As Stuart Staley of Citigroup puts it, the group’s position at the heart of one of the world’s most critical businesses means that "Glencore is the global economy”.

Such success has made the group one of the world’s largest privately held companies. It is also one of the most publicity-shy. Its executives rarely speak in public; it discloses little financial information to outsiders and enforces a quasi-monastic business culture, in which bragging about wealth is close to a sin.

That is set to change. After decades out of the limelight, Glencore is moving towards going public, either through an initial public offering or through a merger with a listed entity.

In dozens of interviews with industry executives, people close to the company, bankers, analysts and reviews of previously little-known Glencore bond prospectuses, a consensus emerges. The change in ownership will reverberate beyond the nondescript, four-storey headquarters in Baar, a sleepy town south of Zurich, to shake up the natural resources industry. It will offer a rare insight into the world’s largest commodities trader’s view on supply-and-demand trends for raw materials just as policymakers, particularly in developing countries from China to Brazil, worry about rising prices.

The underlying reasons for the move – the need for fresh funding to pay for ever pricier new assets – highlight the more profound forces shaping the commodities sector. "The trading companies are facing a size issue,” says the head of a rival trading house. "If you cannot access the equity market, you cannot continue growing.”

Assets such as mines, oil fields and farmland are now far more expensive than in 1987, when Glencore – then a pure trader – became a diversified commodities group with its first acquisition: a 27 per cent stake in the Mount Holly aluminium smelter in the US. A coal mine that fetched as little as $100 million in the late 1980s now costs more than $2 billion.

Others are also adapting. Trafigura, one of the largest oil and metals traders, told bondholders this year it was willing to "access public equity markets” to raise finance for a subsidiary. Noble Group, the Singapore-listed trading house, last year raised about $850 million selling a 15 per cent stake to China Investment Corporation, a sovereign wealth fund.

Size is not the only change. Consolidation in the late 1980s and early 1990s has made the industry less fragmented, reinforcing the need for extra funding among the remaining groups who run much bigger businesses with greater market share.

Amid such profound changes, Glencore started to plot a new future. Such plans will move the group further from its origins under Marc Rich, an oil trader who founded the business under the name of Marc Rich Co in 1974, and sold to management in 1993. According to Daniel Ammann’s book, The Secret Lives of Marc Rich, the founder – who made a lot of money from deals with countries shunned by others, such as apartheid South Africa and Iran – sold the company to management for about $600 million, a figure Rich said was not far from reality.

Glencore has erased Rich from its history, a reflection of its founder’s long-standing legal problems. In 1983, Rudolph Giuliani, then a US prosecutor, indicted Rich for tax evasion and he became a fugitive. On leaving office in 2001, President Bill Clinton pardoned him.

The Rich era was followed by the second generation, from 1993 to 2001, under Willy Strothotte, the former chief executive and current chairman, with a reputation as the world’s best metals trader. He is credited with taking Glencore into industrial assets, underscoring the shift from pure trading house.

Strothotte may not have invented the combination of trading house and commodities producer – legendary firms such as Metallgesellschaft and Philipp Brothers were predecessors. But under him Glencore perfected the model, integrating sourcing, production, marketing and trading. Competitors are mostly focused on a single commodity, or are essentially vehicles of major producers, or are geographically narrowly focused.

The third and current generation is lead by chief executive Ivan Glasenberg, a 52-year-old South African who cut his teeth trading coal before taking over the company’s operations in Hong Kong and Beijing. He leads a team of 12 partners who, alongside the chairman and chief financial officer, include a cadre of nine departmental heads – several of whom are still in their thirties. It was at one of the twice-yearly strategy meetings of partners that the decision was taken to overturn one of the core tenets of Glencore’s philosophy and change its ownership structure. As of December, 485 employees owned shares, with "key management” – 65 executives – controlling 57.5 per cent of them.

The reason for the move can be expressed in a single word: growth. Glencore makes enough cash to buy back the shares of retiring partners, keep its coveted investment-grade credit rating, and retain its current asset portfolio. Inside and outside the company, almost everyone agrees that it does not need extra money to pay its retiring staff – as long as it stops investing in new business.

To grow further, it needs extra funding. The investments in industrial assets, from coal mines in South Africa to farmland in Argentina, are critical to the company’s "competitive strength” as they account for about half of its profits and, according to a bond prospectus, they provide "a long-term, stable supply of raw materials, market intelligence and access to operating and technical know-how”.

Henri Alexaline of BNP Paribas says that, in the current commodities "super-cycle”, Glencore spots investment opportunities daily. "In their mindset, the question is not whether to invest but how much money they have in their pocket to do so,” he says.

While the strategic logic of the move appears clear, the question remains how it will change the company. Much like investment banks Goldman Sachs and Morgan Stanley before their IPOs, Glencore has a reputation for secrecy and a smartest-guys-in-the-room arrogance. "When you negotiate with them, you may secure a relatively good deal,” says a rival executive who has dealt with Glencore extensively. "But at the end of the day, you know they are winning. Always.”

Many think its private structure is a source of its success. It can take on risks that shareholders might object to; it can also move more quickly than anyone else. Glencore itself boasts, in its bond prospectus, that its "consistent profitability” is a "direct result” of its management ownership.

Other trading houses, such as Noble and New York-based Bunge, have successfully made the transition to public ownership. In terms of company culture, Goldman and Morgan Stanley demonstrate that aggressive, entrepreneurial private customs can survive in public.

Indeed, back at headquarters in Baar, the belief is that Glencore can operate as a public company almost as it does today – with the advantage of fresh funding. Regardless of whether it stays private or not, the current management is set to stay and unlikely to retire any time soon.

Even so, some change is inevitable. The need to secure shareholder approval would slow down decision-making and could water down the appetite for risk. Shareholders may prefer smooth year-on-year profit growth to the current longer-term view of the profitability.

In its convertible bond prospectus, the company spelt out this philosophy: "The fact that members of the management risk their own capital motivates them to take a long-term view of Glencore’s overall performance, and to protect the capital.”

That said, the group is now – under Glasenberg’s direction – quickly moving towards becoming public. It has welcomed strategic investors through a $2.2 billion convertible bond last December that was taken up by First Reserve, a US-based private equity group; GIC, the Singapore sovereign wealth fund; BlackRock of the US; and Zijin Mining Group of China.

The next step would be the most radical: an IPO or a merger with London-listed, Swiss-based miner Xstrata is likely as soon as early next year, according to people familiar with Glencore’s internal debate.

If it goes for an IPO, Glencore is unlikely to float its whole capital, opting for a relatively small listing – most likely in Europe – as a first step. Retiring employees selling their stake would increase the company’s free-float after that.

Either process would reshape the company and, at the same time, trigger a massive windfall for its employees. Morgan Stanley and Citigroup are already advising Glencore and preparations could start in the next six to 12 months, if market conditions are right.

The company already owns about 35 per cent of Xstrata, with which it also shares a chairman: Strothotte. A merger would be the easiest way to go public. Glencore was instrumental in creating Xstrata. In 2001, it sold the coal assets that underpinned the miner’s 2002 IPO. Glasenberg, say executives from rival companies who know him well, has long dreamt of reuniting Glencore and Xstrata.

But a merger is not without difficulties. Glasenberg has been talking to equity investors – some of them also Xstrata shareholders – to gauge their interest on Glencore’s potential IPO. Currently most investors appear to prefer that it first float and, later, try to merge with Xstrata. But industry observers say this path could prove more expensive for Xstrata shareholders than a merger. The price of a merger with a listed Glencore could well prove higher as the trading house would then be unlikely to be flexible in negotiations. Besides, analysts reckon its post-IPO shares are likely to rise considerably.

But the miner’s shareholders and executives are concerned about valuing the trader. While Glencore’s investment in assets could be relatively easily valued, the worth of its traders is more difficult to measure. Nonetheless, the strategic investors who bought into Glencore’s convertible bond arrived at a number: $35 billion. The bond was priced in July 2009 – although not closed until December – at the depths of the financial crisis, and bankers believe the true value is now far larger, at $50 billion-$60 billion.

Glasenberg is likely to pursue the merger option to the bitter end. If that fails, he is determined to proceed with a multi-billion dollar IPO. Within the trading circles in Baar, it is clear what Glencore would prefer. Executives joke that Xstrata’s name – a consultancy’s invention combining "extraction” and "strata” – actually stands for Glencore’s "exit strategy”.

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