Noble Misses Its Glencore Moment
Noble Group fired two of the few remaining bullets in its depleted arsenal on Friday.
But don't expect a $522 million rights issue and the departure of founding Chairman Richard Elman to add up to the embattled commodity company's Glencore moment of redemption. While the bond market is right to bet that pressure on Noble's liquidity might finally ease, questions remain both about the harsh dilution of shareholders and the Singapore-listed firm's vexing management structure.
First, the rights issue. The offer for investors is to buy one new share for each they already own at S$0.11, compared with Thursday's closing price of S$0.30. China Investment Corp., the third-biggest shareholder, has agreed to take up its full quota, and Elman, Noble's largest owner, is subscribing to less than his full entitlement. But minority investors still need to approve the deal, which will lower the per-share value of the company's tangible assets by 43 percent from March.
Worse yet, the deep discount is a rebuke to the S$138 million ($100 million) that Noble has spent buying its own stock last year at an average cost of S$0.67. Those purchases now look like a futile and expensive attempt to prop up a slumping share price. At Friday's offer price of S$0.11, the buybacks will have destroyed about S$115 million of shareholder value, according to Gadfly's calculations. 1
It's not too hard to understand why Elman's departure as executive chairman will occur sometime within the next year and not immediately. On Monday, CEO Yusuf Alireza, who had for four years braved everything from a short-seller attack to slumping commodity prices and questions about aggressive accounting practices, unexpectedly left. Investors could have been rather more badly rattled if the chairman had also exited four days later with two recently appointed co-CEOs left steering the ship.
Still, Elman's continued presence has stopped being a confidence booster. Shareholders would have been far better served if the board had elevated Alireza as chairman instead, provided the former Goldman Sachs executive wanted the job. 2 That would have blunted the edge of the rights issue, and helped shine the spotlight instead on the imminent improvement in Noble's balance sheet.
About time. While asset-sale announcements by Glencore in December and Anglo American in February have helped make those companies the two best performers in the Bloomberg Europe Metals & Mining Index so far this year, Noble shares are in the doghouse. The 13 percent drop on Friday extended a two-year price decline to almost 82 percent. Other than the sale of a second slice of the agriculture business it started offloading to China's Cofco in 2014, the group has made no significant changes to restore its financial health.
That's now changing. For bond investors, the math is easy enough: Add to the $522 million rights issue the $1.2 billion Noble hopes to get from selling its profitable North American electricity-trading business, plus the $300 million to $500 million of working capital that would be saved from it, and it's sufficient to repay bank debt coming due in 2017. As for equity investors, here's their lollipop: A part of whatever operating cash Noble makes from its remaining operations can be deployed in "high return" businesses.
Elman says his idea of high profitability is a return on equity of 25 percent. That sounds overly optimistic, especially if the company is serious about pruning leverage. BHP Billiton couldn't hold on to a 20-percent-plus return after the China resource boom in 2012, and Glencore couldn't go past 17 percent. Shareholders will be satisfied if Noble's next chairman can set a more modest goal of earning the company's cost of capital.
Unfortunately, the weird management structure left in the wake of Alireza's departure is unlikely to help that.
Not many companies go down the split-CEO route. The lack of clear lines of authority tends to complicate decision making -- Oracle, Samsung 3 and Deutsche Bank all saw revenue fall after adopting the structure. The rare instances where it has worked have tended to be in companies where a founder remains in place as the informal leader -- think Chipotle, Whole Foods, even BlackBerry in its glory days.
The planned departure of Elman may be a necessary sacrifice, but it won't help this dynamic. It's bad enough having joint CEOs without a lame duck chairman as well.
The value-destruction figure is about S$96 million at the theoretical ex-rights price of S$0.205, the data show.
That's questionable, given his stated opposition to selling off Noble Americas Energy Solutions, which will contribute most to the slimming down of Noble's balance sheet.
Since March 2013, Samsung has had three concurrent CEOs.
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