April 19 (Bloomberg) -- It is the blockbuster share sale of the year. When it lists in London next month, the Swiss commodities company Glencore International AG may well be valued at more than $60 billion. It will be too big to ignore.
But like any initial public offering, it raises a crucial question: If the owners of the business are selling, is this the right time to be buying?
The answer is no. Glencore is essentially a trading company. It has a lot more in common with an investment bank, a hedge-fund manager or a private-equity firm than it does with a mining conglomerate. And the one thing traders are supposed to be good at is timing the market, so they are more likely to know the right moment to sell shares to unsuspecting buyers.
Glencore will be a fantastic business one day. Don’t believe any of the warnings about the commodities boom being over. It still has a long way to run. But the time to buy the shares will be after all the hype has subsided -- not when it is at its peak.
After three decades as a closely held partnership, Glencore, which changed its name from Marc Rich & Co. when management bought out fugitive U.S. financier Marc Rich in 1994, is about to enter the public spotlight. It has a compelling investment case to make: Glencore owns big stakes in resources companies, employs 2,700 people in its trading units around the world, and about 54,800 people at its industrial subsidiaries.
It is the largest shareholder in Xstrata Plc -- that holding alone is worth $24 billion. That is an attractive collection of assets, and one that should excite investors.
And yet it is going to be a hard business to value. Nothing else like Glencore really exists, so there are no easy comparisons to make. And, of course, the commodities rally may have a few speed bumps along the way. Goldman Sachs Group Inc. last week recommended investors reduce such holdings, predicting that prices for oil, gold and copper will fall over the next three to six months.
There is probably some truth in that. Oil and gold have had a good run in the last few months. If there is any sign that growth will slow in China, or any of the other major emerging markets, commodity prices will be hit hard.
Even so, this isn’t a three-to-six-month trade. Over time, the bull market in raw materials will continue. As living standards in the emerging economies approach those of the developed world, people will consume a lot more. Factories will need more stuff coming in to ship things out the other side. Even if supply rises to keep up with demand -- and that won’t always be possible -- this will still be a much larger industry in five years than it is today. So it is a good place to invest.
The main concern about Glencore isn’t the state of the commodities business. It is about timing.
The record shows that when trading businesses come to the market, investors usually get outfoxed. Take Goldman Sachs, for example. No one disputes that it is a great bank. But if you bought shares in its IPO in May 1999 and sold in November 2008 you would have lost money, though there would have been better selling opportunities along the way.
How about Fortress Investment Group LLC? The manager of hedge and buyout funds sold shares at $18.50 in February 2007. They are now valued at less than $6. Blackstone Group LP, the world’s largest private-equity firm, priced its IPO at $31 in 2007. The shares now trade at less than $19.
The underlying message is always the same: Trading firms are great for the senior dealmaker, but they are a mixed bag for outside investors.
There is no great mystery about that.
First, the people on the inside inevitably know more about what the immediate prospects are than anyone on the outside. Senior managers may well have lock-ins that stop them from selling shares for a set period, as Glencore’s do.
“Is it the top of the cycle?” Chief Executive Officer Ivan Glasenberg said in an interview with Bloomberg reporter Jesse Riseborough last week. “Who knows, who cares? We are only potentially selling out in five years’ time, so let’s worry about the market in five years’ time.”
It doesn’t make any difference. They will still choose a point that looks like a peak in the market to sell. They can’t help themselves: cashing in at the top is in their blood.
Second, there is always the risk of key staff drifting away. For the best traders, a partnership is a more satisfying place to work than a publicly traded company. There is more freedom and greater rewards: things that traders want most. Who wants to be tied up with a lot of boring rules for less money? If the star traders start to move elsewhere, though, the business immediately loses value.
Glencore will be a big company for a long time to come. But pick up the shares cheaply in a few months’ time. That, after all, is what its traders would do.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)
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