Glencore shouldn’t need to lean on cornerstones

April 11, 2011

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

HONG KONG — Glencore has yet to launch its initial public offering in Hong Kong, but the commodities trader is already acting like a local. It has talked with big investors to potentially take a stake ahead of the potential $10 to $12 billion offering, in return for staying put for a few months. These investors, called “cornerstones”, are de rigueur in Hong Kong, but serve little purpose. A company of Glencore’s stature can afford to break with tradition.

The list of possible cornerstones for Glencore will be long, since the trader — which is likely to seek a $60 billion equity valuation — is one of a kind. Large sovereign funds like Kuwait’s have appeared in past floats. Qatar’s fund, and billionaire Li Ka-shing, have been rumoured to be talking to Glencore. The reason for doing so is that if the shares are hugely oversubscribed, they are assured of getting the amount of equity they want. And if they plan to be long-term holders, the lock-up shouldn’t sting.

Cornerstones’ job used to be to lubricate the listing process for companies with literally no track record outside of China. That was particularly useful in the early 2000s, as China began to privatise state-owned firms that were unknown to the world at large. Tycoons and entrepreneurs, trusted by the local populace, would lend their name to a float, and their cachet would ensure it got away.

Today, it’s hard to see what cornerstones add other than to fuel investors’ exuberance. Underwriters appreciate them for two reasons: first, by tying up a chunk of the issue, cornerstones create an enhanced sense of scarcity. Second, because it plays to the “me-too” character of small investors, who still carry a lot of weight in Hong Kong listings.

Glencore is merely the latest of many. Insurer AIA signed up cornerstones, as did Agricultural Bank of China. Hong Kong’s regulator has acquiesced with the practice even though such big names shouldn’t need a helping hand. But a process that creates a false sense of competitive tension between two sets of investors, and fuels demand based on buzz rather than fundamentals, is hardly worth preserving. It will be a shame if a company of Glencore’s visibility reinforces it.

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