IPO likely but not Glencore's only option

LONDON Tue Mar 8, 2011 11:20am EST

Logos are seen in front of Swiss commodities trader Glencore building in Baar near Zurich January 5, 2010. REUTERS/Christian Hartmann

Logos are seen in front of Swiss commodities trader Glencore building in Baar near Zurich January 5, 2010.

Credit: Reuters/Christian Hartmann

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LONDON (Reuters) - Glencore GLEN.UL is considering a London stock market listing this year that could value it at $60 billion. But while an initial public offering (IPO) is an attractive option given market valuations, it is not the only avenue open to the world's largest commodity trader.

Following are its main options:

PULL THE TRIGGER ON IPO

Like investment bank Goldman Sachs, which floated in 1999, Glencore wants the permanent capital that comes with a listing, freeing it from the uncertainty of a private partnership, where payouts to departing partners shrink the capital base.

An initial public offering (IPO) would boost its ability to make larger acquisitions by using shares as currency.

Although Glencore has told investors that no decision has been taken over a share offer and that it does not want to commit to a timeframe for making a decision, expectations that it will go down this route have risen.

The downside of pulling the trigger for Glencore Chief Executive Ivan Glasenberg is that he would lose his closely guarded privacy and be open to public scrutiny.

An IPO would also give partners in Glencore hefty pay-outs on a scale not seen since the Goldman flotation.

TAKE OVER XSTRATA (FOLLOWING IPO)

Glencore holds around 35 percent of Xstrata XTA.L and has strong historic ties with the Anglo-Swiss miner, leading to speculation that the two will merge to create a combined company with a market value of more than $100 billion.

Glencore's Glasenberg has weighed a merger with Xstrata as an alternative route to the public markets, people familiar with the matter say, although the idea has been resisted by Xstrata's investors who want a public valuation of Glencore.

Glencore's unique business model means that it does not have a natural peer and it is difficult to value the privately held trading, mining and resource investment conglomerate.

Xstrata's Chief Executive Mick Davis told a recent analyst call that an independently listed Xstrata and an independently listed Glencore was "unsustainable in the longer term," HSBC said in a research note.

TAKE OVER XSTRATA (AND FORGET IPO)

One theory is that Glencore's charm offensive will give it the valuation it needs to persuade Xstrata's Davis to come to the negotiating table and talk terms.

With sell-side research analyst notes in his back pocket saying that Glencore is worth north of $60 billion, it would put Glasenberg in a far stronger negotiating position with Davis, given Xstrata's own market capitalization of around $67 billion.

SELL STAKES TO KEY INVESTORS

The conglomerate could also try to attract key investors such as sovereign wealth funds China Investment Corp CIC.UL and Qatar Investment Authority either as cornerstone shareholders in an IPO or as partners in a private company.

Qatar Investment Authority is considering investing in Glencore, the country's prime minister said last week, while a senior official at CIC, China's $300 billion sovereign wealth fund, said he had not heard of any plans to buy a stake.

The IPO "is really directed toward very high profile institutional investors and sovereign funds," said Henri Alexaline, a credit analyst at BNP Paribas.

"In a way it's a bit of a private placement."

As Glencore trades a wide range of commodities and raw materials from its own projects and from third-party producers via marketing agreements, funds looking to invest billions in Glencore may prefer to invest in a private company.

"Transparency can be a competitive disadvantage," said Alexaline.

REMAIN PRIVATE, AND STANDALONE

Glencore could decide that the market valuation it derives following its "Glasnost" is not sufficiently attractive and that it would rather retain its mystery by staying private.

The fact that it has grown exponentially over 30 years without having to go to the equity markets will give Glencore and its partners some comfort, but capital requirements will not go away if it is to compete with rivals for assets.

One way round this would be for Glencore to issue another convertible bond. The commodities bull run means the group would be able to command better terms than it did in December 2009 when it issued a bond.

SPIN-OFFS

If it doesn't go ahead with the flotation, Glencore may look at selling off some assets to raise cash. But a major spin-off or a move to split the company's marketing and industrial assets is not thought likely.

The company has moved away from its pure trading roots. Its industrial assets business, which includes stakes in publicly listed miners including Xstrata, has grown so much that it is now the group's biggest earnings contributor.

Glencore told investors last week that while a restructuring of its Kazzinc gold unit was continuing, any spin-off would not be possible before the third quarter, and that it could be retained as a commodity hedge.

(Writing by Alexander Smith; Editing by Sitaraman Shankar)

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