Glencore’s £6.19 billion ($10 billion) initial public offering got off to a tepid debut in London yesterday. The world’s biggest IPO so far this year finished its first day of conditional trading flat after gaining 5.5% at one point in the afternoon.
That was a disappointment to some, but investors in Asia were happy just to see a stock that was stable on day one after several recent high-profile IPOs have traded below their issue price. Glencore priced the deal at £5.30 a share early yesterday morning, with the price for Hong Kong retail investors fixed at the equivalent of HK$66.53 per share.
The Swiss producer and trader of commodities initially offered the shares in a range between £4.80 and £5.80, but earlier this week tightened the range to £5.20 to £5.50 to send a signal to investors that it would not try to squeeze every penny out of them by pricing towards the top. At the same time, the new range forced investors with limits set towards the bottom of the range to move towards the mid-point if they wanted in on the deal, which many of them did.
If the 10% greenshoe is allocated in full, the deal size could increase to $11 billion and surpass OAO Rosneft’s $10.7 billion offering in 2006 to become the largest IPO in the UK since 1999.
In the short-term there should also be support for Glencore from UK index funds, which were allocated less than 10% of the deal, as they increase their stake to match its expected weighting in the FTSE 100 and the MSCI UK indices -- one syndicate research report estimated that Glencore will be the third-largest stock in the benchmark index after Shell and BP.
Reports during the two-week bookbuilding indicated there was solid demand for the IPO from institutional investors and sources said more than 1,000 submitted orders in the end. Overall, the deal was about 4.3 times covered and, if you exclude the Hong Kong retail portion and the $3.1 billion cornerstone tranche, the remainder was well over five times covered, sources said. As a result, many investors had their orders cut back significantly.
Sources estimated that about 50% to 60% of the order amount came from long-only funds, while hedge funds accounted for about 30% and private banking and high-net-worth individuals for some 10%.
Prior to launch, Glencore had also secured $3.1 billion from a high-profile group of cornerstone investors, including an $850 million commitment from the Abu Dhabi sovereign wealth fund (Aabar Investments PJSC), $400 million from the Government of Singapore Investment Corp, and $360 million from Blackrock. Another nine investors put up smaller amounts ranging from $100 million to $225 million. Based on the final deal size, they bought a combined 31% of the IPO, which they will be prevented from selling for the first six months after listing.
The demand came from across the world, including offshore Brazil, Australia, and Glencore’s home market in Switzerland, in addition to the usual buyers in the US, Europe and Asia. The conversion ratio from the one-on-one investor meetings was close to 70%.
The response to the Hong Kong retail offering was quite weak, however, with a subscription ratio of just 3.9 times. This meant it wasn’t even close to the first clawback trigger, which would have required a subscription ratio of at least 15 times, and as a result the retail tranche was kept at 31.25 million shares.
Given that the offering coincided with a sharp drop in global commodities prices and investors have lost money on several other recent Hong Kong IPOs, their hesitancy was perhaps not too surprising. The absolute price that Hong Kong investors had to pay when submitting their orders (HK$79.18) was also quite steep since it included a 7% buffer on top of the UK price to allow for potential exchange rate fluctuations during the offer period.
Based on the total number of shares issued, 2.7% of the deal was allocated to the Hong Kong public. Including shares allocated to institutional investors who asked to receive their shares in Hong Kong, a bit more than 6% of the deal will be traded on the Hong Kong stock exchange to begin with, according to sources. While not huge, some $600 million worth of shares should provide decent liquidity.
Unconditional trading will start on May 24 and the stock will debut in Hong Kong on May 25.
Based on the final price, Glencore sold approximately 1.17 billion shares, which was equal to 16.9% of its issued share capital. This gave it a market capitalisation of about $59.2 billion at the time of listing. Of the total $10 billion deal size, $7.9 billion were new shares while the remaining $2.1 billion were secondary shares sold by the existing management shareholders.
The listing ends more than 35 years of being run as a closely held 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 generated $145 billion of revenues — close to $400 million per day — and posted a net profit of $3.8 billion, a 41% improvement from the previous year.
Its business is divided into three distinct parts: the marketing business, and listed and unlisted mining assets. The latter includes a 35% stake in Swiss mining company Xstrata that is valued at about $24 billion, and an 8.8% stake in Russian aluminium producer UC Rusal.
Glencore CEO Ivan Glasenberg told the Hong Kong media during the marketing process that as a trader, Glencore rarely takes outright price views on an underlying commodity, which makes it less affected by a decline in commodities prices than the producers and mining companies. Instead, the company makes money primarily from the logistics part of its business and by looking for arbitrage opportunities between different geographies and between differences in spot and futures prices.
He also argued that the recent fall in commodity prices is a short-term adjustment caused by speculators bailing out from their positions. The underlying fundamental dynamic remains strong, he said, as both India and China continue to increase their consumption of various commodities, while at the same time there is a shortage of supply in many products due to interruptions in production and delivery.
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 were joint global coordinators and bookrunners for the offering, while Bank of America Merrill Lynch and BNP Paribas were joint bookrunners.
