Would Glencore IPO herald end of commodity boom?

LONDON Mon Mar 7, 2011 7:51am EST

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LONDON (Reuters) - Investors have a good reason to question whether Glencore's prospective share listing heralds the end of the commodity bull run.

The reputation of the world's biggest commodities trader for having a sharp sense of timing and of where markets are heading, fed by a global web of on-the-ground intelligence, is making investors uneasy about future returns.

"It's interesting that people who have been in commodities for a long time feel now is a proper time to sell some assets," said Andrew Cole, a fund manager at Baring Asset Management.

"Also noteworthy is that these are strategic decisions after what has been a significant bull market."

An initial public offering (IPO.L) by Glencore could raise $16 billion (9.8 billion pounds) and value the company at as much as $60 billion.

Commodities have ramped up this year as investors flood the market with cash as they face an abundance of liquidity and look for exposure to economic and demand growth with high returns.

Copper hit a record $10,190 a tonne last month compared with levels below $2,000 a tonne in 2003.

In the past, IPOs in a sector that is sizzling with price rises have often signalled that a top is near. Parallels are being drawn with the float of U.S. bank Goldman Sachs (GS.N) in 1999 at the height of the dotcom bubble.

The Swiss-based trading firm sounded bullish about the future when it released annual results last Thursday. But many investors are wary, for example, that high oil prices could undermine global economic growth, which would in turn drag down commodity prices overall.

RIGHT THING AT RIGHT TIME

Brent crude oil at around $117 a barrel is hovering near two-and-a-half-year highs. It has soared as tensions in the Middle East and North Africa have escalated.

"We're not far from a retreat (in commodity markets). A possible catalyst could be the turmoil in the Middle East," said Ian Morley, chairman of Wentworth Hall consultancy.

"It (the IPO) is probably the right thing at the right time if you are a shareholder there, but whether I want to be a buyer, I don't know."

Philippe Bonnefoy, founder of fund firm Cedar Partners, expressed doubts about the motives of bankers and attractiveness of deals that feed investors with what he saw as expensively priced commodity companies.

"These large commodity trading firms are run by very smart, very seasoned traders," Bonnefoy said.

"If they choose to sell equity rather than borrow at a historically cheap interest rate of 2 to 3 percent, they are expressing a view about relative valuations."

An IPO could signal Glencore is looking to build a war chest to better take advantage of any commodity price drops and resulting shrinking company valuations to make acquisitions.

Other investors suggest, however, that commodities are probably some distance from a peak and note that an IPO can also boost the company's ability to make larger acquisitions by using shares as currency.

COUNTER ARGUMENT

Glencore also sees profit opportunities in warehousing, analysts said. It said on Thursday it wanted to boost its presence in metals warehousing by combining its Pacorini unit with an outside partner.

The company completed its purchase of the metals warehousing division of Pacorini, the Italian family owned company, last September.

The logic for an IPO also includes a need to pay off retiring partners and a realisation the business model is vulnerable, which was seen in the credit crisis, when the cost of buying protection against a Glencore debt default rocketed.

The fact that Glencore regards the current timing as attractive for an IPO does not necessarily mean its partners are preparing for a downturn, some investors argue.

"Commodities have had a good run, and it's understandable that people want to cash in," said Koen Straetmans, senior strategist at ING Investment Management.

"But I think there is still more upside to go for the basic reason that commodities have been driven by demand against tight supplies. Even if economic growth falls back a bit, supply constraints remain."

Furthermore, many top Glencore executives will not be able to cash out after an IPO. Analysts expect they will have to agree to lengthy lock-ins of around five years to assure investors the group will not suffer a brain drain.

"It's always tempting to assume that when smart guys do an IPO, they are calling a top in the market," said Douglas Hepworth, director of research at Gresham Investment Management.

"IPOs disproportionately benefit whoever is in charge at the time ... 'Now' is generally better than the market top if you are one of the guys running the show."

Swiss-based Glencore has until December 2012 to float or merge with another company, according to the terms of a convertible bond it issued in December 2009.

Its options could include offering investors about 20 percent of the company some time later this year, with a listing possibly split between London and Hong Kong.

There are no penalties if markets reverse direction and an IPO is no longer attractive.

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Blog: "The coming of Glencore": reut.rs/fdwJzu

Chart showing M&A activity: r.reuters.com/pyt28r

Chart showing Credit Suisse Glencore total return index: r.reuters.com/syt28r

Chart showing Glencore credit default swaps: here

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(Reporting by Pratima Desai; editing by Eric Onstand and Jane Baird)

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