Glencore IPO: The Commodities Giant That Took on Wall Street... and Thrived
It's payday for the roughly 500 employees who own Glencore (GLEN). Uh, who? Only the biggest commodities trader on earth. The company today raised $10 billion in a London public offering -- the biggest ever British IPO. (And you thought LinkedIn was the only company making an IPO splash today.)
Glencore CEO Ivan Glasenberg's stake in the Switzerland-based company is worth $9.7 billion. The offering also will make instant billionaires of four other top executives, while the remaining employee-owners will rake in an average of $76 billion. The company, which priced shares at $8.60, has a market value of more than $59 billion.
Yet Glencore is more interesting for its mix of expertise, and what that signifies about a changing industry, than for its size. The company, which was founded in the 1970s by trader Marc Rich (yes, the same guy who President Clinton notoriously pardoned on his last day in office for tax evasion and other misdeeds), specializes in buying oil, copper and other commodities and selling them to big corporations. But Glencore is also among the most sophisticated trading firms in the business, allowing it to challenge Wall Street's domination of the sector:
"It's modern financial engineering meshed with an old-fashioned commodity trading house," said John Kilduff, a partner at the hedge fund Again Capital LLC in New York. "It's amazing how this formula has flown under the radar for so long, as the profits and growth of these firms has been astounding."
Advantage Glencore
Although securities giants such as Goldman Sachs (GS) remain much larger than Glencore in terms of assets, the commodities company has several important advantages over its trading rivals on the Street. Perhaps most important, the company is essentially unregulated. That means Glencore can be even more aggressive in its trading than investment banks, potentially generating greater profits (or losses).
Measures of Glencore's propensity to let it roll appear to bear that out. The firm's 2010 average "value-at-risk," a gauge of the firm's daily trading exposure, was $43 million. By comparison, Goldman's VAR was $36 million. For Glencore's traders, bigger risks can mean bigger bucks, which in turn helps the company attract top talent. As financial pundit and former investment banker William Cohan recently told Bloomberg:
"When Goldman was going public, that was the Glencore of 12 years ago, in other words everybody wanted to work at Goldman," said author Cohan. "Now, it's like 'Oh, Goldman, yawn.'"Glencore also operates in more than 40 countries, including resource-rich, and troubled, places like Congo and Colombia. That far-flung network gives it a critical edge in gleaning information that affects the price of oil, zinc, copper and dozens of other commodities. Another advantage is the company's stakes in mining companies around the world, which makes it less vulnerable to trading losses.
Another species of "too big to fail"?
But not impervious to such crashes, of course. A major question surrounding Glencore is whether its securities dealing in time could eclipse the company's core business of buying and selling physical commodities. In other words, could Glencore eventually join big financial players in requiring a costly public bailout if its trades ever blow up? Not for now, says economist Simon Johnson:
There is little sign that a government would feel the need to save Glencore and protect its creditors if it were on the brink of collapse. A restructuring of its debts should not be disruptive to the world economy. Based on the limited information in Glencore's 2010 annual report: even its derivatives book seems unlikely to create system-wide risk.But that could change now that Glencore faces growing pressure as a public company to make its numbers. Johnson notes that Glencore will likely be exempt from derivatives rules imposed by the Dodd-Frank financial reform law. If Glencore's growth ever slows, it will be tempting for management to lever up and push the company deeper into trading.
Tracking the BRICs
And certainly this isn't a company that's afraid to take risks. Glencore's willingness to do business in dangerous parts of the world has frequently gotten it in trouble, and it currently faces allegations of corruption and causing environmental damage.
In the near term, however, perhaps its greatest challenge will be in keeping a cloak over its trading strategies and other businesses. That's obviously harder to do as a public company. Financial regulators also are more likely to take an interest in the company's trading activities, especially if it dives deeper into derivatives.
Over the longer term, Glencore's prospects clearly are tied to global demand for commodities. Some market observers believe that the company's IPO marks a top to the sector, which after a two-year surge has seen prices tumble in recent weeks. I doubt it. So long as China, Brazil, India and other emerging markets keep chugging, commodities are likely to remain, well, a hot commodity.
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