Commodities

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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. 

Sudden Spike
Bondholders cheered news that Noble Group is planning a China-backed rights issue
Source: Bloomberg

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.

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.  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.

In the Red
Noble's net debt has been declining, but remains elevated
Source: Bloomberg

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.

Overdue Spring-Clean
Noble is finally joining other large commodity companies in reducing its levels of net debt
Source: Bloomberg, company reports
* Glencore 2016 figure is based on the net funding forecast in its December 2015 presentation. Anglo American's figure is based on subtracting the forecast $4 billion of asset disposals in its February 2016 presentation from December 2015 net debt levels. Noble Group's figure is based on subtracting the forecast $2 billion in proceeds mentioned on its June 3, 2016 investor call from March 2016 net debt.

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.

Too Many Cooks
The revenue of companies that appointed joint CEOs hasn't always done well
Source: Bloomberg
Note: Figures have been rebased to the quarter in which co-CEOs were appointed.

Not many companies go down the split-CEO route. The lack of clear lines of authority tends to complicate decision making -- Oracle, Samsung 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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The value-destruction figure is about S$96 million at the theoretical ex-rights price of S$0.205, the data show.

  2. 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.

  3. Since March 2013, Samsung has had three concurrent CEOs.

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net