SUNDERLAND ON SATURDAY: Is Glencore a float too far?

By RUTH SUNDERLAND
Updated: 17:02 EST, 22 April 2011

The float of secretive Swiss-based commodities trader Glencore might just be a watershed for the London stock market.

A number of groups with far-flung operations and question marks over their governance have listed in London without causing too much furore, including Indian firms Vedanta and Essar Energy and Kazakh miners Kazakhmys and ENRC.

But the sheer size of the Glencore float and the company’s colourful history puts it in a whole different league.

Serious questions: How well will Glencore adapt to life as a public company?

This could be the float that finally puts the issue of the foreign invasion of the FTSE on the wider agenda, as Kraft’s takeover of Cadbury did with the rash of overseas takeovers of British firms.

There is no great mystery about why Glencore, currently a private partnership, wants to float: it will free up the vast wealth in the company for the benefit of top executives and traders as well as giving it a currency for ambitious takeovers, including a merger with London-listed miner, Xstrata.

Chief executive Ivan Glasenberg’s stake could be worth as much as £10bn and the partners may find their holdings valued at an average of £75m apiece.

But there are serious questions over how well Glencore will adapt to life as a public company and the much greater scrutiny and transparency that will involve.

Given the company’s heritage, it is not surprising some UK investors are expressing worries over corporate governance.

Glencore owes its existence to the notorious ‘King of Oil,’ Marc Rich, who fled to Switzerland after being charged in the US with massive tax evasion and of trading with Iran during the hostage crisis of 1979 to 1981.

Rich, who was eventually – and controversially – pardoned by Bill Clinton – lost control of his empire to a former lieutenant, Willy Strothotte, who reinvented the business as Glencore.

Fears on the governance front have not been allayed by the messy appointment of a swashbuckling chairman to take over from Strothotte.

The chairman’s role of overseeing the board is vital to good governance and any responsible company planning a float would have the appointment organised in good time.

Yet at Glencore it was not resolved until the actual day the listing was announced. Advisers to Lord Browne, the former BP chief executive, were briefing that he had bagged the job only for it to go to Simon Murray, a 70-year-old Hong Kong businessman, polar explorer and former French Foreign Legionnaire.

Quite apart from Murray’s suitability for the role, the handling of the episode was bizarre and suggests governance issues are not being taken as seriously as they should.

Then there is the dramatis personae. Tony Hayward, still one of the most hated men in the US, is taking the post of senior independent director. Nat Rothschild, a friend and business associate of Glasenberg and Hayward, will be a big beneficiary of the float: he stands to make more than £25m thanks to his investment in convertible Glencore bonds in 2009 which look likely to more than double his money.

As well as worries over how well Glencore’s chieftains will adapt to UK codes of boardroom behaviour, investors are concerned about whether the valuation being put on the business is too high.

There is no precedent for a commodities trading business of this size, and some fret that Glencore’s very desire to float may signal the top of the commodities cycle.

Some UK fund managers feel they are seen as an irrelevance by Glasenberg, who has been wooing anchor investors including Middle Eastern and Asian sovereign wealth funds. These funds themselves operate as arms of their governments and, though standards vary, are not always models of transparency.

As for small investors, Glencore’s float will propel it straight into the FTSE 100 and therefore directly into their pension funds, without passing go. A merger with Xstrata is thought all but inevitable, despite tricky relations between Glasenberg and Xstrata’s boss Mick Davis.

That will create an even greater behemoth and add to the dilemma of small investors looking for a diversified portfolio, who are stymied by the dominance of mining and commodities companies in the FTSE.

Their stranglehold is likely to become even more extreme if the London Stock Exchange succeeds in its plans to merge with its Toronto counterpart, since the rationale for that deal is to create the world’s largest marketplace for mining companies.

The influx of foreign firms to the FTSE has happened with no public debate. It has poured hundreds of millions of pounds into the pockets of City advisers. It has also given the firms concerned a kitemark of approval, since a Footsie listing brings a great deal of kudos.

The flagship FTSE 100 index is no longer a barometer of the best British companies, which might be fine if all of those listed genuinely conform to UK codes of conduct.

That is harder to police, though, in the case of a Kazakh-state owned miner with operations in the Democratic Republic of Congo, or a Swiss-based commodities group with mines in Zambia, than it is at Marks and Spencer. If we allow the FTSE to become debased, we will all be losers.