Glencore Slump Spoils Appetite for IPOs

Posted by Joseph Keefe September 23, 2015

Private trade houses less likely to become asset heavy; Olam, Noble, Glencore (GLCNF) experiences urge caution.

Two shareholder revolts in the space of six months at listed commodities firms Noble and Glencore have taught their private rivals an unforgettable lesson - think twice before going public or amassing large physical assets.

Noble's stock is trading near its lowest since the 2008 global financial crisis and Glencore's touched an all-time low on Tuesday due to plunging commodities prices and earnings.

"In the last two years you were possibly better off being private and not being listed, with the short sellers being so active in commodity companies," said Karel Valken, global head of trade and commodity finance at Dutch bank Rabobank.

After the record $10 billion Glencore share offering in 2011, which turned its managers into billionaire shareholders, commodity traders had come under an unprecedented spotlight.

Even though most unlisted merchants kept insisting they saw the private model as the most appropriate for now, many market watchers said it was only a matter of time before the likes of Louis Dreyfus followed suit to raise money for expansion via listings.

Those views first began to change after Olam International hit the headlines in late 2012 when its accounting practices were under attack from short seller Muddy Waters.

Then in February this year Noble came under fire when blogger Iceberg Research alleged that the company was inflating its assets to the tune of billions of dollars by not fairly representing the value of its commodity contracts - claims that a private firm would never have to deal with.

Noble rejected the allegations and a report by board-appointed auditor PricewaterhouseCoopers (PwC) found no wrongdoing in the company's accounting practices.

In the case of Glencore, the recent slide in its share price was triggered by a slump in earnings, which was compounded by a downward revision in its outlook to negative by ratings agency Standard & Poor's, along with an increasingly shaky economic outlook for top commodities consumer China.

"DOOMSDAY SCENARIOS"
This month, the mighty chief of Glencore, Ivan Glasenberg, had to bow to shareholder pressure and agree to cut debt as worries mounted over the firm's ability to protect its rating amid tanking commodity prices.

Glencore's stock has lost 80 percent of its value since its IPO. In August Glasenberg blamed short sellers and hedge funds for the rout, saying they did not understand his business and were painting "doomsday scenarios" for commodities.

Less than a month later shareholders forced him to pledge to cut debts, selling assets and issuing $2.5 billion in new shares to which the management including Glasenberg had to commit $550 million.

For unlisted private traders lower commodity prices are just background noise because their bankers know their model is based on profiting from price volatility and not from high or low prices.

"Our view has not changed - a private company status and ownership by employees is the right model because it embodies a clear alignment between the interest of owners and people who are driving the business," a spokesman for Trafigura said.

Of all the Glencore and Noble rivals, only Louis Dreyfus has openly said it could list one day.

Louis Dreyfus Commodities has issued bonds since 2012 in order to diversify its sources of funding and has adopted similar governance principles as those of a public company, but has no IPO plans at this time.

The company declined to comment on Glencore's situation.

GROWING WITHOUT LISTING
Oil traders Vitol, Mercuria, Gunvor and Trafigura said they would remain private, although Trafigura had in the past envisaged a listing for its midstream division Puma.

Sources at the four firms said their views have only been strengthened by the developments at Noble and Glencore.

Glencore argues that sacrificing its private status has allowed it to outgrow rivals and test a new model where trading complements extracting and refining commodities.

Its rivals retort that they have no shortage of funding when they want to expand despite their private status. Dozens of banks have a combined $100 billion worth of credit lines opened on Vitol, Trafigura, Mercuria and Gunvor.

In terms of asset ownership, traders indeed look strikingly different from the 1970s when the late trader Marc Rich, seen as the founder of contemporary trading, established the firm which later became Glencore.

Over the past decades, trading houses have amassed huge wealth and many used it to buy physical assets ranging from ports to refineries and oil fields.

Glencore used its IPO to go even deeper and heavier into copper and coal asset ownership, a trend which - according to Robert Piller, commodities lecturer at the Geneva Business School - it took to the "extreme" when it bought miner Xstrata (XSRAF.PK) for $29 billion in 2012.

"The trading companies, even though they are adding assets, have maybe 10-15 percent of their balance sheet in fixed assets, so they are still a long way from being considered asset heavy. I don't expect them going anywhere near the levels of asset investment as Glencore," said Piller who is also director of Aupres Consult.

Over the past three years Vitol and Gunvor bought refineries in Europe, Trafigura invested in infrastructure in the United States and Brazil and Mercuria bought business from bank J.P. Morgan - and all the deals were financed by bank loans.

But the four firms say going deeply into exploration would be a step too far as it would effectively mean taking a long position in a certain commodity - a strategy which backfired for Glencore this year as copper and coal prices tanked.

"I think if there is a lesson for the other trading companies it's that their doubts about listing have been confirmed," said Piller.

"I believe the biggest doubts about listing would be pushing yourself into the spotlight," he said, adding that traders had alternatives for raising long-term capital such as via sovereign wealth funds or via bond placing.