Glencore confirms IPO of up to $11 billion

Glencore International, the Swiss producer and trader of commodities, has set the ball rolling for its upcoming dual listing in London and Hong Kong by announcing its intention to float. The obligatory announcement to the London Stock Exchange yesterday confirmed earlier media reports that it will seek to raise between $9 billion and $11 billion, which will make it the largest initial public offering in the world this year ahead of Hutchison Port Holdings Trust’ $5.45 billion listing in Singapore last month.

Glencore said the IPO will account for between 15% and 20% of its enlarged share capital, which will value the company at between $55 billion and $60 billion at the time of listing. That is a large enough market capitalisation for FTSE to include it into its flagship FTSE 100 index after the first day of trading, as per the fast entry rule. It will be only the third company ever to achieve this and the first since British Gas 25 years ago. The early index inclusion means that investors who benchmark against the FTSE 100 can submit orders in the IPO rather than wait to buy in the open market at a later stage.

The institutional portion of the deal will be marketed as a single global tranche, although investors will have to specify whether they want shares to be listed in Hong Kong or London. While there will be no difference between the two markets per se, the fact that there will be conditional trading in the stock – a form of official grey market trading -- in London immediately after pricing on May 19 may lead more investors to choose that market, which could have an impact on the level of liquidity in the stock in Hong Kong. The official trading debut is scheduled for May 24 in London and May 25 in Hong Kong.

Some 2.5% of the deal will, however, be earmarked for retail investors in Hong Kong. Based on the targeted overall deal size, between $225 million and $275 million will be offered through the retail tranche, although there will be clawback triggers that could increase this portion to as much as 10% of the total deal size.

Yesterday’s announcement didn’t include any specifics with regard to the number of shares or the price range, as those will be determined just before the start of the official roadshow on May 4. The two-and-a-half weeks until then will be devoted to investor education by the banks leading the offering and will also be used to firm up the commitments from cornerstone investors.

Bankers working on the deal have confirmed there will be a cornerstone tranche, but haven’t specified the potential size. According to one source, the types of investors approached as potential cornerstone investors have been limited pretty much to sovereign wealth funds, existing shareholders of the company (including the holders of a $2.3 billion convertible bond issued in 2009), and a few other investors who have been following the company for a long time.

The CB holders, which include BlackRock, Government of Singapore Investment Corp (GIC), Zijin Mining Group and First Reserve Corp, jointly own a 6.25% stake in the company pre-IPO. They have the right to convert the bonds into shares at the time of the listing, but sources say they will not do so as the bonds pay an attractive 5% coupon. And with the CB deeply in the money, they can hang on to that for now and convert into shares later.

The offering will include $2.2 billion of secondary shares sold by existing shareholders, although the statement from the company noted that this sale will be to cover expected individual tax liabilities and loans only. Speaking to the media in London yesterday, Glencore CEO Ivan Glasenberg stressed that the partners are not taking money off the table in connection with the IPO.

And, according to the statement, they won’t be able to do so in the near future either. The board of directors and all executive directors have agreed to a five-year lock-up, while the senior management will not be able to sell any shares for the next two to four years. All other employees will be subject to a 360-day lockup. The restrictions for the CB holders look very mild in comparison as they will only be required to hold the shares for 90 days after conversion.

Aside from Glasenberg and chief financial officer Steven Kalmin, who will both become executive directors on the board, Glencore said it has also proposed five independent directors, including former BP CEO Tony Hayward and China’s Li Ning, a former world champion in gymnastics and the founder of a sports retail brand bearing his own name. And in a separate statement late yesterday evening, the company said it has appointed former Hutchison Whampoa group managing director Simon Murray as its non-executive chairman.

The listing ends more than 35 years of being run as a partnership and comes more than 15 years after the company was bought out by the management in 1994. Having started out as a pure trader of metals, minerals and crude oil, the company has grown into an integrated commodities giant that markets more than 90 distinct commodities and is active in every step of the supply chain. Aside from metals, minerals and energy, it is now also involved in agricultural products. It has been consistently profitable since the management buyout and during the past 10 years it has generated an average annual return-on-equity of 38%.

In 2010, it posted a 36% increase in revenues to $145 billion and generated a net profit of $3.8 billion, up 41% from the previous year.

Its business is divided into three distinct parts: the marketing business, unlisted mining assets, and listed mining assets. The latter includes a $24 billion stake in mining company Xstrata and a stake in Russian aluminium producer UC Rusal.

“An IPO is the next logical step in our development and strategy,” Glasenberg was quoted in the statement as saying. “It will provide us with the financial flexibility to capitalise upon long-term growth opportunities throughout our business and achieve further sustainable growth. It will also offer international investors an opportunity to invest in our unique commodities business model and participate in our future growth.”

Glencore will use part of the IPO proceeds to increase its stake in JSC Kazzinc, a Kazakhstan-based zinc miner, to 93% from 50.7%. The total cost of the acquisition will be $3.2 billion, although $1 billion of that will be paid in the form of new shares. Some $5 billion of the money raised will be used to cover capital expenditure in the next three years, while the rest will go towards a reduction of debt and bank borrowings.

Citi, Credit Suisse and Morgan Stanley are joint global coordinators and bookrunners. Bank of America Merrill Lynch and BNP Paribas join them as bookrunners, while Barclays Capital, Societe Generale and UBS are participating in the deal as co-bookrunners.