Glencore: IPO of the Decade, Or Another Blackstone?

| About: The Blackstone (BX)

I spend a lot of time looking for the unusual because in most cases, and with critical thinking and lot of questions — I find myself engaged in monologues, giving the impression to onlookers that I must be missing a few brain cells — the good and macro market clues can be found hidden deep among the actions and statements of the most powerful in this world, not necessarily the brightest. I do it for the love of the game and this endeavor brings satisfaction.

To most investors Glencore doesn’t ring a bell and that is the way the company liked it — until now. Remember the last pardon issued by Bill Clinton while he was still in office? It went to Marc Rich, the alleged fugitive from American tax justice, and a brief description can be found at Time magazine. No politics, just a point of reference. The corporate roots of Glencore go back to when Marc Rich founded the company Marc Rich & Co AG in Switzerland in 1974, although Mr. Rich’s name has been long forgotten and he’s no longer associated with Glencore. Although I have been aware of its existence as the largest, privately held, commodity trader in the world, I could not have not written as good an article as the one Reuters published on February 25, 2011, titled “Special report: The biggest company you never heard of,” which I recommend as a must read, especially if commodities are in your blood — or portfolio. The following excerpt summarizes the company extremely well.

In the world of physical trading -- buying, transporting and selling the basic stuff the world needs -- Glencore is omnipresent and controversial, just as Goldman is in banking. Bigger than Nestle (OTCPK:NSRGY), Novartis (NYSE:NVS) and UBS in terms of revenues, Glencore's network of 2,000 traders, lawyers, accountants and other staff in 40 countries gives it real-time market and political intelligence on everything from oil markets in Central Asia to what sugar's doing in southeast Asia. Young, arrogant, and often brilliant, its staff dominate their market. The firm's top executives have forged alliances with Russian oligarchs and well-connected African mining magnates. Like Goldman, Glencore uses its considerable heft to extract the best possible terms in every deal it does. Some might add that Glencore also fits the description that Rolling Stone magazine gave to Goldman: "a great vampire squid wrapped around the face of humanity."

As the article delves further into the corporate culture, comparing Glencore more to DHL than Goldman Sachs, a reminder is offered that cold, calculating minds prevail and “within the commodities and mining sectors, Glencore is regarded with a mix of admiration and fear. ‘It's an incredibly performance-based culture -- investment banking times three, probably,’ says a second outsider.”

Unlike Chicago traders who scream out bets on the future prices of orange juice or pork bellies, physical commodity traders negotiate prices and arrange shipments of cargo quietly, keeping their positions well hidden from others.

How focused are they? “I have no idea what sort of family life these guys have. This is everything,” an outsider stated, and the fear can be felt because some didn’t want to be identified for the article. About Ivan Glasenberg, the CEO? “Despite being a billionaire in charge of thousands of staff, ‘this is a guy that picks up his own phone,’" the second outsider said.

When one thinks that one’s analyses are solid, although one relies on informed reasoning and extrapolations for lack of “true” real time data, an outsider that declined to be identified put Glencore in perspective: "Their knowledge of the flow of commodities around the world is truly frightening," humbling the best minds in the business.

And that statement is exactly what is at odds with Glencore’s IPO. A company that has operated in the shadows for 40 years, is now disposed to the inevitable disclosures that are associated with going public, while being extremely obvious that the partners don’t give something up for nothing. The argument can be made that they want to grow and require the funding, and there’s nothing unusual about the IPO. Maybe, but I don’t think so, and that is why Blackstone (NYSE:BX) made it into the headline, because I’ve seen this story before and I have already written about it in my book.

To illustrate the capital raising effect, a company comes to mind. Blackstone Group is a private equity firm that specializes in “alternative” asset management, with funds in real estate, funds of hedge funds, and just about anything where there is a buck to be made. Nothing wrong with that! Two guys, Stephen Schwarzman and Peter Peterson, founded the firm in 1985 and took it public in June 25, 2007, right about when the Dow was still around 13,300. The opening price of $35.74, with a daily high of $35.77, was above the $31 price set for the IPO. The stock never saw a $35.77 bid ever again, and one year later, to the day, Blackstone closed at $19.01 [2008].

The Blackstone fellows cashed some of their chips, and the Dow still rose above 14,000 until October 2007. In short, the firm took in $4.13 billion for a 12.3% share of the business, effectively valuing Blackstone at $33.5 billion. Pretty sweet for a company with only $2.7 billion in sales! I will bet you that most investors thought that for a cool $4 billion, the public owned a great majority of the company. But nobody bothered to ask, and the headlines didn’t mention it. One of the few guys that voiced a contrarian opinion was Jim Jubak, and he wrote on in April 2007, “Blackstone IPO is a Must-Miss.” The article highlighted the valuation concern, yet he predicted that the stock would sell like “ice water in the Sahara.” Why? Because nobody asks the tough questions and the stock’s marketing machine will invariably throw sand in our eyes.

October 2007 came, the subprime disease started to spread, the credit markets froze, and the rest is history. Today [2010], three years later, Blackstone trades around $10, and even at that price, the insiders are still sitting on a ton of dough. Not so for the public at large, because the stock started its journey south on the very same day that it went to market.

The amusing fact is that the firm invested $20 billion between 1987 and 2007 in 109 private equity deals, such as Hilton Hotels, The Weather Channel, and Universal Studios, among others, embodying diversification in a box. But here’s the question: “Why, in twenty years, didn’t the company raise the money in the stock market?” I never got the call, and would love to have had the chance to make a few bucks — even with their fees and all that jazz. According to their financials [2010], they’ve lost money ever since they went public. In this case one could say that they raised capital to shrink!

Timing is what jumps off the Glencore IPO headline, and with commodity markets still feeding the “we’re all going to run out of everything” frenzy, the season to sell stock in potentially the most coveted company in the world, with a firm grasp of something that the public views as the new normal, is only natural. And like Blackstone, Glencore is most likely signaling the turn, not the green light to continue forward as far as commodities are concerned. And as a side effect, the BRIC story, which has been largely riding the commodity gravy train, will become just another brick in a very large wall.

The decision to go public has not been made yet, but that may be the marketing machine at work, bringing the brand to market, building awareness through well crafted messages, and creating demand. As the Reuters article “Glencore IPO aims for the stars as Qatar eyes stake” highlights, “an initial public offering of privately held Glencore could value the company at as much as $60 billion, according to Liberum Capital estimates, making it one of Europe's biggest listings ever,” while two “advertised” reasons for the IPO are given.

A public listing would allow Glencore, a partnership, to keep growing even if its partners wish to leave. It would also bolster the Swiss-based trader's balance sheet, reassuring credit-rating firms, and allow it to make major acquisitions using shares as payment. Glencore's senior management team, led by 54-year-old Chief Executive Ivan Glasenberg, is presenting to sell-side analysts in London "over a couple of days" to improve their understanding of the company and its operations, the source added.

The company target markets are London and Hong Kong, but it knows that the U.S. is part of the prime financial playground, and Michael Lynch-Bell of Ernst & Young told Reuters that “If you are raising money in the London markets and you are raising anything over about $200 million then the banks will almost inevitably want to tap the U.S. market." When and if the IPO is brought to market hinges on some technicalities.

Glencore's most recent audited financials are for the full year to December 31, [2010] which gives it until mid-May. After this point, the accounts would be considered stale. The firm might then have to either push back its IPO to prepare more up-to-date accounts or reduce its access to key U.S. funds.

Not that every IPO sends a strong message, and that all players are shrewd or clever, but when did Goldman Sachs (NYSE:GS) go public? Smack at the cusp of the bubble: May 1999. Thus the question is “Why is Glencore going public, when for the past 40 years the company operated happily without sharing its secrets and success with investors?” One must look at the core business, and what the company does best and knows best, how to trade commodities -- from gold to oil, wheat to corn, it touches just about everything consumed by Earthlings. The fact that Qatar is “the cornerstone” of the IPO should not bring comfort, because China pumped $3 billion into Blackstone as reported by The New York Times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.