Glencore International AG's plans for IPO

Glencore International AG's plans for an initial public offering could draw unprecedented scrutiny to the global trade in raw materials, and give the commodities firm access to a new vein of financing. It could also trigger another round of deal-making in the natural-resources sector.

                                                                                                                                                         Xstrata/Bloomberg News
 
Xstrata is seen as a likely target for Glencore, which already holds a 34% stake in the Swiss miner. Here, an Xstrata project in Australia.

The closely held Swiss commodities firm plans to sell as much as $10 billion of its shares by June in Hong Kong and London, according to people familiar with the matter. At $10 billion, the IPO would be the fourth-biggest on record in Europe, according to Dealogic, and would value the firm at $60 billion, including debt.

The share sale will be watched not just as a gauge of investor sentiment but also as an indicator of the likelihood and shape of a long-speculated tie-up between Glencore and mining giant Xstrata PLC, in which Glencore already owns a 34% stake.

The move would bring change to the industry, as Glencore and many of its largest rivals aren't publicly traded and often operate in great secrecy, benefiting from the often specialized knowledge they gain from both producing and shipping goods around the world and adjusting quickly to rapid-fire changes in supply and demand.

The IPO will serve a number of purposes for Glencore, including enabling older partners to cash out of the business and give the firm capital to invest in expansion. But it isn't clear how going public might also change Glencore's hard-charging culture, or its profile. It would be one of the largest partnerships to go public since Goldman Sachs in 1999, and while that bank has remained highly profitable since selling shares to the public, it also has been exposed to a different set of risks and regulatory constraints.

Glencore is one of the world's largest traders of aluminium, nickel and other metals as well as a major seller of other products including oil, grains and sugar, and operates in more than 40 countries. As of March 2010, its total assets were $67.5 billion, according to a bond prospectus. In 2009, its consolidated revenue amounted to $106.4 billion.

Glencore's rivals—among them France's Louis Dreyfus Group and Cargill Inc., the Minneapolis agribusiness giant—also are players in the industry. But being able to tap the stock market would give Glencore access to a source of financing that is unavailable to many competitors.

An IPO also could smooth the way for the eventual combination of Glencore and Xstrata—perhaps through the acquisition of Xstrata by Glencore, according to people familiar with the matter. Xstrata, a London-listed miner of copper, coal and other commodities , has a market value of ?42.5 billion （$67.5 billion）.

Establishing a market value for Glencore could ease price negotiations between its chief executive, Ivan Glasenberg, and his opposite number at Xstrata, Mick Davis, and provide extensive disclosure of Glencore's business activities, which Xstrata's shareholders would likely demand before approving a sale or merger of the company into Glencore.

Glencore has operated privately as a partnership, amid much secrecy, since it was founded in 1974 by commodities trader Marc Rich. In 1983, the U.S. Justice Department charged Mr. Rich with tax evasion and with buying oil from Iran while it held U.S. hostages. Mr. Rich, who is no longer involved in the business, was pardoned by then-President Bill Clinton as Mr. Clinton left office in 2001.

Disclosure of Glencore's business activities in turn could shine a spotlight on what is expected to be the fabulous wealth generated over the years through the business by Mr. Glasenberg and his partners.

Glencore and Xstrata have said little publicly about either a Glencore IPO or a merger, but Mr. Davis said in response to a question on an investor call in December that "I have not had a proposal to consider from Glencore suggesting that they merge with Xstrata, and if they were to make one, it would be considered in the context of the 65% [non-Glencore] shareholders."

Glencore wouldn't be able to vote its shares should any such deal be proposed.

But after a trading pattern in Glencore shares has been established, which could take several months, the two sides are expected to explore a deal.

A tie-up would bring huge advantages to both, bankers and analysts said.

"For Xstrata, having access to the large, liquid capital pool of a combined entity should be very attractive if it wants to make further acquisitions," said Peter O'Malley, head of resources and energy banking in the Asian-Pacific region at HSBC.

Xstrata has failed in recent years to strike a number of M&A deals, including a merger with U.K. miner Anglo American PLC.

Glencore, mainly a trading business, also would benefit from access to Xstrata's resources, Mr. O'Malley said. "What more natural way to move into physical assets than a merger with its cousin, Xstrata?"

The companies could also reap cost savings by eliminating overlapping infrastructure, analysts said.

A merger with Glencore could be seen as a capstone to the career of Mr. Davis, who built Xstrata into a giant through a series of acquisitions. He has continued to argue the case for further consolidation in the sector.

But analysts said he needs a deal less than Glencore does. "Xstrata has grown out from under the shadow of its largest shareholder," said Andy Davidson at Numis Securities.

Whether the two companies could strike a deal is far from certain. If the strong recent performance of mining stocks sputters, that could help undermine the will of the companies to merge. Fears over a culture clash would also need to be overcome. Putting Glencore together with Xstrata could alienate Glencore's other mining-industry customers.

The two companies have longtime links. In 2001, Glencore called off a plan to float some of its coal assets in the wake of the Sept. 11, 2001, terrorist attacks in the U.S.

Mr. Davis suggested Glencore sell the properties to Xstrata, then a small mining company he had recently taken charge of, rather than list them. Those assets formed the basis of Xstrata's IPO on the London Stock Exchange in 2002.

The two companies also share a chairman, Willy Strothotte, and Glencore already markets some of Xstrata's output and advises it on how to most profitably sell its product.

But tension erupted between Messrs. Davis and Glasenberg in 2009 when Xstrata wanted to sell shares to shore up its finances. Glencore couldn't afford to participate in the rights issue, so in lieu of cash, it injected its coal operation in Colombia, Prodeco, for the equivalent of $2 billion.

To settle their differences over the price of the coal deal, however, the two sides agreed that Glencore would have the option to buy back the business at a higher price. It ultimately exercised the option last year, buying it back for $2.5 billion. At the time, some shareholders were angry at what they saw as the special arrangements between the two companies.
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