Abigail with attitude: Glencore and Goldman
Senior employees of Glencore must feel that the gods are smiling on them. This month the $11 billion Glencore initial public offering priced before being listed on the London and Hong Kong stock exchanges. This IPO is one of the most important deals since Lehman went bankrupt. It will be the largest deal ever listed on the London Stock Exchange and the largest ever mining IPO. But what does it say about the state of the commodity market? When private equity firm Blackstone went public in June 2007, I wrote: "The flotation was a success despite the jittery market. However, Wall Street worries that when Blackstone CEO Steve Schwarzman is a seller, it’s unwise to be the other side of the trade." By the way, Blackstone’s shares priced at around $35. Today, they trade at $17.
Isn’t the Glencore IPO eerily similar? Glencore is a leading commodity trading company. As a private firm, it was shielded in the shadows and run discreetly from headquarters in a Swiss backwater, Zug. The chief executive, Ivan Glasenberg, has seen the valuation of the company increase more than 100 times since he joined it 27 years ago. When Glencore lists, Ivan will be a multi-billionaire. Can this be the right time to buy Glencore shares? One could argue that as the senior executives cannot sell all their shares immediately (and Glasenberg has said he does not intend to sell any shares), anyone who buys now will be a co-investor with some of the smartest men in the commodity world. But I look at it differently. When these guys are selling, do you want to be buying? In late 2009, Glencore issued a $2.2 billion convertible bond issue targeted at institutional investors. It offered a 5% coupon and was convertible to shares of the company if it was floated. Big investors included BlackRock, Fidelity and Singapore’s GIC. A lucky purchaser purred: "We are set to double our money after only 18 months. We want to cash in and will sell all our shares as soon as we can." That’s a delicious return but once again I ask, when the big boys tiptoe away, do you want to hurtle in?
Would it be too insensitive to ask a basic question such as why does the company need to go public? After all, Glencore has operated superbly as a private entity. There is some muttering that the company wants a "currency" so that it can expand its activities. I don’t buy this. Surely Glencore’s expansion has been just fine over the past 30 years? Too many rumours swirl about a possible merger with, or takeover of, Xstrata for me to discount such a possibility. Glencore already owns some 30% of this mining company. Again, I don’t understand the merits of such a deal apart from making big Xstrata shareholders (chief executive Mick Davies has spent roughly £9 million buying Xstrata shares in the past three years) more wealthy. An equity specialist said: "The good news is that the deal got done against a poor backdrop for commodities. And the deal was not priced at the top of the range, so Ivan left some money on the table. The bad news is that although it was cleverly marketed with the concept of cornerstone investors, I don’t think the bookrunners converted many of their meetings with key institutional investor into buy orders. The deal closed two days after pricing below the offer price of £5.30. That’s not exactly a resounding endorsement of the demand dynamic."
Nevertheless, the Glencore IPO is excellent news for some investment banks. The deal should produce fees of more than $275 million. The global coordinators are Citi, Credit Suisse and Morgan Stanley. It is intriguing to see that Goldman Sachs, JPMorgan and Deutsche Bank are not part of the 23-bank underwriting syndicate. Morgan and Deutsche are advisers to Xstrata but Goldman’s absence is less obvious. Ironically, Goldman was not in the top rank of underwriters for the Blackstone IPO either.
I remain worried about Goldman. In my April column, following the revelation that Goldman board member Rajat Gupta had been involved in the Galleon insider trading scandal, I wrote: "I am intrigued how many blows the Goldman Sachs brand can suffer before it is decisively diminished." Regular readers know that where Abigail ventures, others tend to follow. Now Matt Taibbi, the Rolling Stone journalist who coined the "great vampire squid" analogy for our premier investment bank, has launched another diatribe against Goldman Sachs. This new article argues that the firm should face criminal charges following a report by the Senate sub-committee chaired by Democrat Carl Levin. Goldman’s stock is down 20% year to date, which is poor compared with Morgan Stanley (down 12.6%) or JPMorgan (up 1.5%). I wonder if the market is trying to tell us something?