Glencore International plc
Aleksander | Alvin | Quyet Thang | Ying Ling | Zhao Yu
1
Agenda
Were the decisions made by Glencore in line with its business strategy?
Why choose IPO?
Was the timing of IPO correct? Was the decision of re-acquiring Prodeco a good move?
Introduction
Company Background
Leading integrated producer and marketer of
commodities
Metals and minerals, energy products and agriculture products Operates in 30 different countries Multiple interest in business related firms
Biggest IPO in LSE and HKEX
Introduction
Company Background | Business Segments | Operations | Business
Business Segments
Metals & Minerals Marketing Activities Industrial Activities Energy Products Marketing Activities Industrial Activities
Main assets: Xstrata (34.5%), Katanga (74.4%), Kazzinc (50.7%), Mopani (73.1%) Agricultural Products Marketing Activities Introduction
Main assets: Prodeco (100%)
Industrial Activities
Source: Glencore Annual Report
Company Background | Business Segments | Operations | Business Strategy 5
Worldwide Operations
Introduction
Company Background | Business Segments | Operations | Business
Geographical Footprint
Introduction
Source: Glencore Company Report; Bloomberg
Company Background | Business Segments | Operations | Business
Geographical Footprint
Source: Glencore Company Report; Bloomberg
Introduction
Company Background | Business Segments | Operations | Business
Business Strategies
Increasing geographic scope and diversification of operations
Capitalizing on strategic investments in business related
assets Using additional capital and liquidity to grow the business Focusing on cost management and further enhancing logistical capabilities Maintaining conservative financial profile and investment grade ratings
Introduction
Company Background | Business Segments | Operations | Business Strategy 9
IPO Listing
10
Overview of IPO
Issuer: Glencore International Plc
Date: 19th May 2011
Securities offered: Ordinary shares
Offer price: 530 pence
Free float: 18.3% Glencores valuation based on IPOs share price: $60 billion
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
11
Initial Intentions to Float Earlier
Glencore had the intention to float in 2008 Commodity price peaked in June 2008 but dropped
thereafter
Souce: Bloomberg. Only include IPOs of amount larger than $10 million.
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
12
Impact of the Financial Crisis
Glencore also faces financial distress during this period High CDS price means higher chance of bankruptcy Glencore would raise less capital in 2008 than they did in 2011
Souce: Bloomberg
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
13
Impact of the Financial Crisis
Significant fall in the number of IPOs during 2008 and 2009
Number of IPOs 250 200 150 100 50 0 180 160 140 120 100 80 60 40 20 0
2006
2007
2008
2009
2010
2011
IPO on LSE (all industries)
IPO Worldwide (Basic Material)
Souce: Bloomberg. Only include IPOs of amount larger than $10 million.
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
14
Rationale for IPO in 2011
Changing business structure - a shift from marketing to industrial activities
Required huge capital expenditure
(US $'million) Adjusted EBITDA preexc. Marketing Activities % Shares Industrial Activities 2008 6,787 3,215 47% 3,572 2009 3,929 1,606 41% 2,323 2010 6,201 2,367 38% 3,834 Projected 2011 7927.2 2,616 33% 5,311
% Shares
53%
59%
62%
67%
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
15
Rationale for IPO in 2011
Why was IPO the best choice at the time?
Internal Financing
Not enough to fund billion-dollar acquisitions
Debt financing
Possible credit rating downgrade
IPO
Right timing Decreases the financial leverage IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
16
Right Timing
US$ Million Total revenue Operating profit Net profit 2010 144,978 4,340 3,751 2009 106,364 1,967 1,633 2008 152,236 1,336 1,044
200 150 100 50 0 $200,000 $150,000 $100,000 $50,000 $-
2006 2007 2008 2009 2010 Total Revenue Commodity Price Index
Net profit in 2010 increased 118% to $3.7 billion
Glencores financial performance is linked to the commodity market - With the commodities price rally in 2011, Glencore was at its best performance at the time of the IPO
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
17
Right Timing
April 14 Announceme nt May 19 Global Offer
IPO Listing
Commodities have been on the rally since 2009 The value of Glencores assets is highly correlated with the commodity prices High commodities prices led to high analyst valuations
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
Souce: Thomson CRB Index
18
Dual Listing of IPO
Dual listing
London Stock Exchange (LSE)
The primary listing place US$8.8 billion
Hong Kong Stock Exchange
Attract global initial offering volume US$2.2 billion
Lock-up period Board and Executive directors Senior managers
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
19
IPO Performance
530 pence and HKD 66.53 per share
Oversubscription
Four to five times; orders well above $32 billion Reflects the economic situation Cornerstone investors (including Singapore GIC) were allocated 31% of the global offer
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
20
Post Performance
14th June: 500pp 10% lower 24th May-24th August530pp - 347.95pp (35%lower)
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
21
Post Performance
14th June: 500pp 10% lower 24th May-24th August 530pp - 347.95pp (35%lower)
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
22
Post Performance
IPO Listing
Overview | Rationale | Timing | Dual Listing | Analysis of IPO
23
Capital Structure
24
Business Risk
GLENCORE
Diversified business
Metals and Minerals
Energy Products Agricultural Products Xstrata (34.5%) Katanga (74.4%) Kazzinc (50.7%) Mopani (73.1%) Prodeco (100%) Grains, oils, cotton, sugar, etc.
Marketing Activities (Trading)
Capital Structure
Industry Activities (Mining)
Source: Glencore company report
Business Risk & Financial Risk | Capital Structure Analysis | Equity
25
Business Risk
Strong exposure to the commodity market
200 180 160 $120,000 140 120 100 80 60 $40,000 40 20 0 $20,000 $$ 000,000 $160,000 $140,000
$100,000
$80,000 $60,000
2006
2007 Total Revenue
2008
2009 Commodity Price Index
2010
Capital Structure
Source: Glencore company report http://www.indexmundi.com
Business Risk & Financial Risk | Capital Structure Analysis | Equity
26
Financial Risk
Increased Debt
$35,000 $30,132 180% 160% 140% $25,000 $20,405 $18,316 $16,755 $15,000 80% 60% $10,000 40% $5,000 20% 0% $23,589 120% $30,000
$20,000
100%
$-
2006
$ 000,000
2007
Total Borrowings
2008
2009
Debt/Equity Ratio
2010
Capital Structure
Source: Glencore company report Business Risk & Financial Risk | Capital Structure Analysis | Equity 27
Implication
Uncertainty in economy
Rising debt levels
Economy
Debt
Capital Structure
Business Risk & Financial Risk | Capital Structure Analysis | Equity
28
Capital Structure in 2011
Lower debt Higher cost of capital Higher financial flexibility
$3.6bn
Tax Shield
1H2011 Debt/Equity Ratio (long-term debt only) Debt/Equity Ratio WACC
Capital Structure
2010 0.93 1.54
2009 0.98 1.41
2008 0.85 1.19
2007 0.64 1.30
2006 0.69 1.53
0.60 0.83 8.73%
6.68% 6.42% 7.76% 8.11% 7.30%
Business Risk & Financial Risk | Capital Structure Analysis | Equity
29
Implications of Sticking With Old Structure
High Debt/Equity ratio
Possible downgrade of credit rating
Higher cost of capital
1H2011E
Debt/Asset Ratio Debt/Equity Ratio WACC 0.50 2.23 Higher Higher
2010
0.38 1.54
2009
0.36 1.41
2008
0.30 1.19
2007
0.34 1.30
2006
0.36 1.53
6.68% 6.42% 7.76% 8.11% 7.30%
Capital Structure
Business Risk & Financial Risk | Capital Structure Analysis | Equity
30
Change in Equity Structure
Source: Glencore company report
Capital Structure
Business Risk & Financial Risk | Capital Structure Analysis | Equity
31
Convertible Bonds
$2.142 billion convertible bonds were issued in 2009 5.5% (403,435,000 shares) of Glencores equity
Capital Structure
Source: Glencore report Business Risk & Financial Risk | Capital Structure Analysis | Equity
32
Convertible Bonds
Cornerstone investors
Tor Peterson
5%
4% 5% 6% 6%
Alexander Beard Telis Mistakidis Daniel Mate Badenes New shareholder (ex. Cornerstone investors) Ivan Glasenberg Other Glencore partners
47%
Exercise price of at least 361 pence Cornerstone investors
5% 5% Tor Peterson 4% 4% Alexander Beard Telis Mistakidis 6%
11%
16%
6% Daniel Mate Badenes 45% 11% New shareholder (ex. Cornerstone investors) Ivan Glasenberg 15%
Other Glencore partners
Shares from convertible bond
Capital Structure
Business Risk & Financial Risk | Capital Structure Analysis | Equity
33
Re-acquisition of Prodeco
34
Overview
Fully owned subsidiary of Glencore 3rd largest exporter and thermal coal producer in Colombia Explores, produces and transports high-grade coal Market Europe & North America
2 opencast mines Operation Port facilities s Railway
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
35
Timeline of Prodecos Acquisition
1995 1998 March 2009 March 2010
Purchase of Prodecos operations in coal development project Establishment of Glencore coal Acquisition by Xstrata plc Re-acquisition by Glencore
1995
2009
2010 present
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
36
Analysis of Prodecos Acquisition by Xstrata
To provide Glencore with sufficient funds for participating in Xstratas rights issue Largest stakeholder of Xstrata with 34.5% ownership interest
Cashstrapped during rights issue
US$504m net income in 1Q 2009
Sale of Prodeco at $2.023bn to provide sufficient funds for participation in rights issue
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
37
Analysis of Prodecos Acquisition by Xstrata
Issue price = 2.10 Closing price = 6.23
No. of outstanding shares before rights = 488,000,000
No. of outstanding shares after rights = 2,448,000,000
No. of Shares Outstanding Share Ownership Before Rights Participation After Rights Before Rights After Rights Dilutio n
3,529,764,00 0.00% 0 1,176,588,00 Without Participation 338,100,000 1,048,882,800 338,100,000 -66.67% 0 Total Outstanding 10,231,200,0 980,000,000 3,040,240,000 2,940,000,000 00 Shares 338,100,000 1,048,882,800 1,014,300,000 Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
38
Analysis of Prodecos Acquisition by Xstrata
Possible consequences of not participating in rights issue:
Share dilution of 66.67% with the 2-for-1 rights issue Smaller share of the pie for dividends distributed No longer the largest stakeholder
Sale of Prodeco
Call option granted to re-acquire within 12 months at a premium price
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
39
Re-acquisition of Prodeco
Call option exercised on 5th March 2010
US$2.25bn including other notional profits accrued from 1 Jan 2009 & net balance of cash invested by Xstrata
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
40
Why Exercise Call Option?
High valuation of Prodeco at $4 to $5 billion
Increase in Prodecos revenue by 20.75% between 2009 to 2010 Expansion in coal production 2013 2010 19.9m 10m tonnes tonnes 2015 20.7m tonnes
Important driver for Glencore to continue generating growth in mining sector
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
41
Why Exercise Call Option?
Prospective IPO
Prodeco would be able to attract a high valuation during the IPO Glencore intended to channel 13% of IPO ($919m) proceeds to Prodeco for investments in infrastructure
13% 4% 6%
Debt repayment IPO expense Kazzinc additional stake
12%
32%
Capex (expansion project in Kazzinc) Capex (expansion project in Mopani) Capex (expansion project in Prodeco)
8% 12%
13%
Capex (expansion project in West African Oil Assets) Capex (expansion project in Glencore's other industrial assets)
Distribution of Proceeds from IPO
Source: Glencore IPO Prospectus
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
42
Why Exercise Call Option?
Greater dividends from Xstrata
Flexibility for Xstrata to deliver 50% volume growth by 2014 (CAPEX) Growth in Xstrata greater dividends for Glencore shareholders
Future of Coal
Increase in coal price by 20-30% during re-acquisition Demand for coal likely to increase in future
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
43
Implications of Re-acquisition
Sources of finance for re-acquisition
Net cash generated from operations
Sale of $1bn worth of assets for $400 million
Desirable?
Increase in net debt from US10.2bn in 2009 to US$13.6bn in 2010
US$2.4bn accounted for exercising call option
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
44
Implications of Re-acquisition
Business was considerably unaffected as increased earnings and operating cash flow compensated for the increase in net debt
Debt coverage ratio remained largely unchanged
Investment ratings remained unchanged (BBB-)
Re-acquisition of Prodeco
Overview | Timeline | Analysis of Selling | Analysis of Re-acquisition | Implications |
45
Challenges Ahead
46
Challenges Ahead
Fall in commodity prices is likely to negatively impact Glencores financial position
Possible excalation of the sovereign debt crisis Increasingly strict environmental regulations
Challenges Ahead
47
Conclusion & Outlook
48
Conclusion
Were the decisions made correct?
IPO Listing
Allows investment in other industries Expansion in current businesses Allows further acquisitiondriven growth
Reacquisitio n of Prodeco
Helps Glencore strengthen its position in mining industry Improve financial position of Glencore
49
Conclusion
Conclusion | Future Outlook
Future Outlook
Use cash obtained from IPO to buy shares of related companies at discount Decrease in reliance from metal & minerals business segment
Purchase stakes in companies in the research and production of biodiesel
Focus on emerging markets (e.g. China & India)
Conclusion
Conclusion | Future Outlook
50
