Glencore: Glencore is getting real about what it is worth. The commodity trader’s forthcoming initial public offering in London and Hong Kong is the most eagerly awaited new issue in years. But it has resisted the temptation to go overboard. The price range for the deal, which values the company’s equity at $47 billion to $58 billion before $7.9 billion of new money, looks reasonable enough — certainly at the lower end of the range.
A proper valuation for this unusual business will only be possible after detailed scrutiny of the 1,000-plus page prospectus being issued imminently.
Glencore is partly a miner, with controlling stakes in some top quality assets; partly an investment trust, with minority stakes in both listed and unlisted assets; and partly a trader in commodities.
Each of these three pieces deserve different valuation methodologies, but a crude analysis suggests the price range is in the right ballpark.
At the bottom end, Glencore has an implied enterprise value of $61.8 billion. That would equate to a multiple of eight times the record $7.7 billion Ebitda that Glencore made in 2007 — a performance likely to be easily replicated in 2011 based on last year’s fourth-quarter results.
Glencore’s awesome trading business means it deserves, say, a 20 per cent premium to pure-play mining groups. Shares in Xstrata and BHP Billiton trade at levels implying forward EV/Ebitda multiples of only 5.5 and 7. So far, so good.
But at the top end of the range, the valuation is more of a stretch. To justify it, Glencore would have to take its financial performance to another level. That is what some analysts believe it is set to do, forecasting Ebitda of $11 billion this year. The cornerstone investors doubtless agree, given they have committed to buying $3.1 billion of stock at the top-end pricing.
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This is a good starting point for the debate about Glencore’s fundamental value and the suitable size of the IPO discount.
After some earlier missteps over governance, Glencore’s float is now on a surer footing. Post-float, however, the shares face challenges: a possible stock overhang, concerns about an unproven board and the fact that the company remains something of an unknown quantity. That would make a pricing at the top end especially risky.