Opinion

Felix Salmon

Why Glencore’s going public

By Felix Salmon
February 25, 2011

I can highly recommend the big Reuters report on Glencore, a company likely to go public some time in the second quarter at a valuation somewhere in the neighborhood of $60 billion.

Even before the IPO, there’s lots of speculation about what Glencore will do with the proceeds, which could be $16 billion or more. Top of the list is further growth — a merger with Xstrata alone would probably suffice to push the capitalization of the combined company over the $100 billion mark. The deal will also mean a huge uptick in the wealth of Glencore’s partners, who currently cash out at book value. Given that the company is likely to trade on a multiple of 3x book, no one’s going to be doing that any more.

Glencore has been a highly secretive operation from its earliest days under Marc Rich, and constitutionally hates the transparency involved in being public. So if even Glencore is capitulating, what does that say about my thesis that the stock market is increasingly irrelevant?

For one thing, I think it says that Glencore is run by highly-aggressive traders who judge themselves and others on how much money they have. Billionaire CEO Ivan Glasenberg is no philanthropist, and neither does he feel, as many Silicon Valley founders do, that what their companies do is more important than how much money they make. Far from mistrusting speculators, Glasenberg is one. So the only real reason to stay private is the question of privacy. But Glencore already gives enormous amounts of financial information to so thousands of people around the world — it told Reuters that “full financial disclosure is made to all of the company’s shareholders, bondholders, banks, rating agencies and other key stakeholders.” As a result, anybody important who wants to know details of Glencore’s finances can probably find out pretty easily.

Going public will certainly mean more press for Glencore — and given what the company does, more press necessarily means more bad press. It’s hard to position yourself as a major force for global good when your main businesses are mining and commodities speculation, and when you generate a lot of your edge by being willing to do deals with highly-corrupt politicians that other companies won’t touch. But Glencore’s bosses are hardly the first people to make the calculation that for hundreds of millions of dollars, they’re OK with being hated.

There’s also a sense of statistical inevitability about going public. You can stay private for decades, but the option of going public will always be there, and there will always be charming investment bankers telling you what a wonderful idea it is. A single moment of weakness, and it’s done. And once done, it’s more or less irreversible. A unified and single-minded family like the Cargills can stay resolute — but that’s an impressive feat, and if Glencore starts draining Cargill’s milkshake after it goes public, even the Cargills’ resolve might waver.

This part of the Reuters report stood out for me:

Glencore’s arrival in the FTSE would intensify the London exchange’s shift into natural resource firms. Fox says the increasing domination by a single sector is a “big headache” for smaller British investors who want a diversified portfolio. “It concerns me as much from a financial perspective as a moral perspective,” he says. “Customers will not expect that when they invest in a mainstream UK growth fund that a third of their money will end up in commodities.”

The point here is that the stock market, at least in the UK, is becoming a commodities play — much as the Russian and Brazilian stock markets have been for some time, not to mention Canada and Australia. Betting on commodities is all well and good, but it’s not the same as investing in the economic growth of a country. “While the stock market is certainly not a perfect reflection of corporate performance,” Ira Millstein tells me, “it is one measure.” That’s true — but it’s a measure of declining utility. The Glencore IPO only serves to underline how the stock market is more of a reflection of global asset values and of financial speculation than it is of underlying corporate performance in the real world.

Comments
8 comments so far | RSS Comments RSS

“The deal will also mean a huge uptick in the wealth of Glencore’s partners . . ”

i think that sums it up nicely. these guys know their business and its future prospects better than anyone. that they are selling out seems to indicate a top in commodities in near

Posted by arrgh | Report as abusive
 

Simple solution — if you don’t want a third of your money invested in mining/commodities companies, then CHOOSE YOUR OWN COMPANIES. This is part of why index investing (or investing in “mainstream mutual funds” that essentially track indexes at a higher cost) is intellectually bankrupt. There is no particular reason why any individual should WANT to be investing in every sector according to their arbitrary proportion of the market.

I’m invested in a few Brit ADRs, only one of them a resource/mining company. Surely it can’t be so difficult for British investors to do the same?

Posted by TFF | Report as abusive
 

My take on why they are going public is that since they are speculators, they would rather speculate with other people’s money. Sure, companies can always raise capital privately, but it is nowhere near the amount a big company can generate on a public market. And then they can pay themsleves giant bonuses every year, regardless of their shareholders’ compensation. And if they lose their bets, oh well, tomorrow’s another day.

Posted by KenG_CA | Report as abusive
 

Typo: In the last sentence you write “The Cargill IPO…” when I believe you mean “The Glencore IPO…”

Posted by right | Report as abusive
 

@right Thanks! Fixed.

 

So you write this…

“Betting on commodities is all well and good, but it’s not the same as investing in the economic growth of a country.”

…just two days after lauding the wonderfulness of Peru’s economic growth.

http://blogs.reuters.com/felix-salmon/20 11/02/23/dsk-ppk-wtf/

“…Peru has performed stunningly well through the global financial crisis, growing at 8% in 2006, 9% in 2007, 10% in 2008, and then bouncing back to 9% growth in 2010 after modest-but-still-positive growth of 1% in the worst crisis year of 2009…”

To take a snippet from your own title line. Salmon, “WTF”? Next you’ll be telling us that Peru’s growth isn’t due to the zoom in commods prices.

And BTW, i can’t wait to see the lid off the black box that’s Glencore, either.

Posted by ottorock | Report as abusive
 

The “Reuters report on Glencore” says, “Glencore’s network of 2,000 traders, lawyers….”
At one time Glencore prided itself on NOT having in-house lawyers. Is Reuters considering outside law firms when it implies that Glencore’s network includes a significant number of lawyers.

Posted by AMusnikow | Report as abusive
 

I believe that a impetus for Glencore going public is that many of its senior executives are scheduled to retire in the next few years. Glencore typically repurchases the equity of people leaving the company. Making the repurchases necessary to repurchase the equity of these senior leaders would be a significant drain on Glencore. While Glencore could manage these payments, going public should allow the retiring senior executives to retain their equity – and prevent the need to purchase the shares. Of course, this motivation supplements the others mentioned above.

Glencore definitely has internal lawyers now, although that may be just another preparation for the IPO.

Posted by bklawyer | Report as abusive
 

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