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Glencore IPO brings out the rah rah in London traders

Glencore mania is gripping London. The company's initial public offering is imminent and is set to be the world's biggest this year. If it works, many more IPOs could follow, restoring London's reputation as the international financial services centre of choice. If it flops, it will deliver a body blow to London's revival efforts, not to mention Glencore's reputation as the smartest guys in the industry.

Glencore's been sprinkling gold dust everywhere in preparation for the IPO, which is due to be priced on May 19. Analysts have been busy pumping out valuation reports and the numbers keep rising as the commodities rally proves enduring.

The average valuation puts Glencore's worth at an extraordinary $62-billion (U.S.). That would make Glencore a billionaire machine. Ivan Glasenberg, the South African accountant who has been Glencore's CEO since 2002, and who owns 15.8 per cent of the company, would have a post-IPO personal worth of almost $10-billion.

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An army of underwriters is in place to flog the newly minted shares. In the lead are Citigroup, Credit Suisse and Morgan Stanley. Below them are Merrill Lynch, BNP Paribas, Barclays Capital, Société Générale, UBS and boutique firm Liberum Capital (Goldman Sachs is a notable in its absence). Legions of lawyers, PR people and consultants round out the Glencore bash guest list. London has seen nothing like it since the boom years of the past decade, which were rudely interrupted by the 2008 financial crisis. Since then, brand-name IPOs have been exceedingly rare.

Glencore has been teasing the market for some time. In late 2009, its convertible bond sale valued the company at $35-billion. But it never promised an IPO. Mr. Glasenberg had hoped instead to engineer a back-door stock market listing by merging with Xstrata, the London-listed mining company in which it has a 34 per cent stake. Xstrata boss Mick Davis wasn't convinced; he wants to see public investors put a value on Glencore before entertaining the idea.

So Mr. Glasenberg had no choice but to plow ahead with the IPO plans, and that's when the hype machine kicked into gear. Analysts seemed to compete with one another to produce the fattest valuations. Of course, the commodities rally helped to inflate the figures. What got lost in the exercise is that Glencore is part miner and part trader, making it hard to value.

The mining assets are easy to value. For the public ones, like Xstrata, owner of Canada's Falconbridge, all you have to do is look at the share price. The value of non-public mining assets can be estimated by attaching a peer-group trading multiple to them.

The trading side is where things get tricky. Trading is a huge business at Glencore, accounting for more than a third of its 2010 earnings before interest, taxes, depreciation and amortization (EBITDA) of $6.2-billion; mining made up the rest.

What valuation to attach to this hybrid beast? That's hard to say, because no directly comparable company exists. While trading oil, coal, wheat and other commodities can be hugely profitable, it can also be hugely risky. Trading profits, it turns out, can fall just as hard and fast as mining profits, though some investors might think otherwise.

Some of the world's biggest and savviest investors have already bought into the Glencore story. Aabar, an arm of Abu Dhabi's International Petroleum Investment Co., is paying $850-million to become the biggest of Glencore's pre-IPO "cornerstone" investors. Fidelity, BlackRock, Singapore's sovereign wealth fund and Credit Suisse Private Bank are some of the other cornerstone names that have collectively committed more than $3-billion to the company.

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Glencore's goal is to use the IPO to raise about $11-billion, meaning it still has another US$8-billion or so to go. The question is: How greedy does Glencore want to be? It can push the envelope and price the IPO at the top end of the forecast valuation range of $62-billion. Or it can attach a lower value to the shares, all the better to ensure they will trade up once the IPO is done.

Glencore is indeed scaling back its ambitions in the hopes of delivering a post-IPO rally. The new valuation for the company is said to be about $55-billion, although the true figure will not be known until the pricing day. That may be low enough to please investors, or it may not. Pricing IPOs is not an easy feat. Just ask Oleg Deripaska, whose flotation of Rusal, the world's biggest aluminum maker, on the Hong Kong market in early 2010 was a disaster. The shares fell 11 per cent on the opening day (although they have since more than recovered).

London's financial services industry is praying that Glencore gets the pricing right. If the new Glencore shares trade down, the other planned mining and energy IPOs will have a hard time making it to market. The city's financial services industry desperately wants Glencore to deliver them a party, not a wake.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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