On The Upcoming Glencore IPO: Is The Juice Worth The Squeeze?

Glencore is the most powerful, connected commodities trading firm on the planet.  Since many valuable commodities are located in politically unstable parts of the world, earning, and more importantly retaining that honor necessitates that Glencore engage in some possibly questionable business practices, some (many?) of which might just happen to violate one or more international laws or sanctions.  Running such operations as a private, closely-held firm based in a quiet corner of Switzerland is hard enough, but doing so as a soon-to-be publicly-traded company in both London and Hong Kong may provide near impossible given the much higher visibility and scrutiny that comes with a public listing.

Joe Upsidetrader had a good post earlier this weekend about how Glencore is like something out of a Tom Clancy spy novel.  Other outlets have gone so far as to liken the firm to one or more evil empire found in a Bond film.  Infamous must a firm be for it to earn such impressive accolades, despite not only being a privately-held off-shore firm (based in Zug, Switzerland), but almost completely off the radar of Main Street (and even parts of Wall Street).

For the uninitiated among you, I strongly suggest you read this Business Week article from 2005, entitled “The Rich Boys,” not for the wealth accumulated by its employees, but in honor of the Man, the Myth, the Legend, Marc Rich, Glencore’s founder and mentor extraordinaire.  If allegations of his disregard for the law are even remotely true, then comparisons of Rich and his cronies to an evil empire of Bond Villain-esque proportions are not necessarily unfair.  Under-the-table deals with despots and dictators, disregard for laws and according to some, a complete disregard for ethical practices, all in the quest for dominance of the global commodities trade.

But now, as the legacy of Glencore, nee Marc Rich & Co AG, prepares its initial public offering, Wall Street anxiously awaits its chance to get a piece of the most successful commodities firm on the planet, and the riches that come with it.  Seldom talked-about though is how those riches are procured.  Mining, exploration, and extraction are not exactly pretty business, especially when said business is in some of the most hostile locations in the world, many rife with what amounts to little more than slave labor.

One way or another, an incredibly wide swath of The Public is going to have some economic exposure to a piece Glencore (both pre and post IPO).  I doubt many pensioners and endowment beneficiaries, to say nothing of the myriad mutual fund owners would be thrilled to know they’re funding a firm described by some as the most evil on Earth. If people are outraged about Goldman Sachs’ business practices, their heads would probably explode if they knew even the half of Glencore’s dirt.

Fund, pension, and endowment managers and trustees should be asking themselves whether they can in good faith support Glencore’s IPO, not from a socially responsible investing perspective, but from an economic one.  Do they want to be left holding the bag when, after the IPO, some of Glencore’s less-proud tactics and practices result in potentially enormous economic liability while insiders cash-out? (Glencore’s CEO has said no partners will be selling shares in the IPO, but that does not mean they won’t at some point down the road)  For their part, these insiders have to be asking themselves whether some liquidity (ok, $10 billion is ALOT of liquidity!)  is worth the heightened exposure and criticism.  Will the firm be able to deliver such stellar results when they have not just every regulator and politician in the world breathing down their neck, but the media, as well?

Perhaps investors will view Glencore no-differently than any other publicly-traded energy/commodity firm, and the concerns about the Ways of Marc Rich are entirely overblown.  But on the other hand, perhaps they are not.  As an investor, legal liability and the uncertainties thereof should at the very-least give one pause before piling-into the trade.  Glencore may be the best in the world at what it does, and buying best-of-breed may often be a winning strategy, but investors should be extremely wary of buying into a firm with such a colorful history.  Given as-yet-”recovered” credit market conditions (at least to full pre-crisis levels), and a global commodity price boom, one cannot blame Glencore management for wanting to take advantage of the opportunity to raise a not-insignificant amount of capital in the equity markets.  As an investor, do you really want to be on the other side of the trade from one of the most successful trading firms in this history?

Caveat Emptor.

This entry was posted in Uncategorized and tagged , , , by Jordan S. Terry. Bookmark the permalink.

About Jordan S. Terry

Founder & Managing Director, Stone Street Advisors LLC. Investment research and consulting for institutions, funds, family offices, wealthy individuals. Long/Short fundamental, value-oriented equity ideas as well as special situations (M&A, restructuring, strategic and leveraged recapitalization, pre-, in, and post bankruptcy). We like following corporate credit, particularly for special situations and short ideas.

8 thoughts on “On The Upcoming Glencore IPO: Is The Juice Worth The Squeeze?

  1. Nice post. After reading The King of Oil, I have to say, I sympathize with Marc Rich, at least based on what I’ve read. He made a market where he saw opportunity in an amoral and apolitical way. Marc Rich controversy aside, I’m not sure I would want to be buying into Glencore now. To be sure, Glencore and its underwriters are timing the IPO when they thing they can get the richest valuation for an equity stake in the company. Which would presumably be when interest in commodities is at its highest. Given their position as one of the biggest commodities traders in the world, they have no trouble timing this. So is this going to be similar to the Blackstone IPO where Steve Schwartzman and partners basically top-ticked the stock (and the entire market)? Maybe. IMHO Glencore motive seems to be a mix of cashing out partners and raising capital. There is speculation tha

  2. (Since I keep fat fingering the enter key, here is the rest.)
    There is speculation that some of the capital will be used to buy Xstrata which Glencore already has a stake in. How much of the cash raised to buy out partners may be the tell whether or not Glencore is a good opportunity for equity investors. Either way, I agree with @The_Analyst, caveat emptor. Personally, I’m not interested in owning companies like Glencore or Blackstone. I operate on the assumption that they are smarter than I am. Therefore, I want to be on the same side of a trade as Glencore, not the other side, in this case where Glencore is selling equity.

    • I think I added the link after your comment, but the CEO says partners aren’t selling any stock in the IPO. Not alot of info out there yet, but I’d be surprised if they didn’t start selling shares as soon as any lock-up period is over…of course if they’re the kind of schemers many believe them to be, they’ve sold shares to a SPV that itself is selling shares, which would make the CEO’s statement not un-true.

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