How Glencore crashed through the equity markets

STEVE KALMIN IS the chief financial officer of Glencore, perhaps the most talked-about company of the past 12 months.

Glencore is a commodities firm that recently undertook the biggest IPO in the history of the London Stock Exchange and the largest ever non-privatization IPO in Europe. In 2010, it posted adjusted ebitda of $6.2 billion on revenues of $145 billion. Some of the world’s most influential sovereign wealth funds and investment firms rank among the company’s shareholders.

Kalmin is part of a management team that more than one banker describes as "among the best I have ever worked with".

And yet Kalmin wants to keep as low a public profile as possible, despite being CFO at one of the 20 biggest companies on the FTSE100. When Euromoney approached Glencore in the summer to ask to talk to Kalmin and his chief executive Ivan Glasenberg about one of the landmark deals of the past decade, the initial reluctance was telling.

After some cajoling, the offering up of written questions and gentle prodding from the company’s bankers, Kalmin agreed to a telephone interview with the proviso that he might not allow himself to be quoted. Eventually, he agreed to go on the record but no photo would be provided. Kalmin, like Glencore itself, is wary of publicity.

Glencore polarizes opinion. On the one hand it submitted itself to the IPO process, the most public scrutiny a company can have, but it is loth to cast off the secretive nature that has often defined the business since its inception in 1974 by Marc Rich.

Few deals have divided opinion as much as the $10 billion IPO the company launched in the teeth of turbulent equity markets in May. Bankers say Glencore’s management did a brilliant job. Investors sitting on losses of close to 20% since then might beg to disagree.

Two faces of an IPO

When Euromoney finally catches up with Kalmin, in mid-September, he has just spent three weeks going from meeting to meeting with shareholders after Glencore announced its half-year results.

Clearly, the performance of the stock since the IPO has been a regular subject of conversation.

Kalmin says: "In the main, investors are still supportive and philosophical about it. It’s important to also look at the movement on a relative basis and over a longer period going forward as we’ve been in the midst of a risk-reduction phase since June and July. Almost all of our top shareholders have continued to maintain their sizeable presence on our share register since the time of the IPO."

Looking back at the deal, he says: "We never intended to be aggressive on price and leave a bad taste in anyone’s mouth. It was always the plan to leave some money on the table. We felt it was priced fairly at the time, taking into account the market and shape of the book, which was heavily oversubscribed at every point in the price range. However, complete visibility on markets is often a challenge."

What’s not in doubt is that the deal was a strategic success for Glencore. It secured valuable proceeds that arm it to build its production and snatch acquisitions even as others in the sector struggle. This is perfect feeding territory for Glencore, a highly acquisitive firm that has grown strongly by being prepared to pay for second-tier and third-tier mining assets when owners’ finances are stretched and other buyers are scared away, and then building them into first-tier producers.

Glasenberg emphasized this positive outcome from the IPO in late August at the company’s half-year results. "We have a robust balance sheet, with available committed facilities of $10.4 billion, while our gearing is down at 22 from 44 and our investment-grade ratings have been strengthened." He noted that while the fear surrounding sovereign debt has prompted investors to take cash out of the equity market and put it in safe havens, commodity prices have not fallen so sharply. "We still see strong demand in Asia while many producers are struggling to increase production." Glencore now has the financial resources to realize existing capital expenditure projects to increase its own production. It aims to do more besides, already having announced a string of small acquisitions since the IPO closed.

Glasenberg hopes the company’s stock can yet command a growth premium. He said: "We continue to push to exceed GDP growth on the volume side of the business by increasing market share."

Analysts of the company note that rather than being a pure play on rising commodity prices or even on volumes, Glencore is a company whose marketing business does well in conditions that are slightly harder to identify but are discernible today. This can be seen in the tightness of markets between consumers in emerging markets still showing strong demand and producers struggling to expand supply. This is when it can increase its margin per unit of volume.

But investors are in no mood to take any of this on trust, because for those who bought shares at 530p the IPO has been anything but a success. "It’s a deal that hangs over the market," one source says. "And Glencore needs to work on its relationships with these investors if it wants to come back to them in future for bigger deals." The company has been doing exactly that. But to investors it must sound rather lame for the company and its ardent backers to plead that while its shares have sunk so have everyone else’s.

The portfolio manager at a large UK long-only fund manager says: "Part of the problem for Glencore is that, having traded flat on the first day and fallen since, it never had any period of consolidating at above issue price that might have built some support. Instead it was a prime candidate for investors to sell." He adds: "It was doubly unfortunate that it then appeared to miss consensus earnings estimates on its first results announcement just weeks after listing. This company has now set the bar high for itself. Management now need to hit their numbers consistently, prove these are predictable and the businesses resilient in tough economic conditions, and it had better not make any mistakes on acquisitions."

Beyond sycophancy

The build-up to Glencore’s IPO stretched across three years from roughly the spring of 2008 when the financial system crisis took hold. Bank credit, on which the company heavily depends, contracted and spreads on Glencore credit default swaps widened sharply. According to those outsiders who worked closest with the company over this time at its core banks, to some who were on the fringes of the deal and even a few that were not included, if there is one management team in the industry that can repair the damage since the IPO, it is Glencore’s.

Euromoney is used to hearing bankers boosting clients in the hope of seeing their comments make it into print and then claiming favour but the descriptions of Glencore’s management go way beyond the usual sycophancy. Some of the acclaim would make a hardened cynic blush.

One banker says: "This is the best management team in the sector by a considerable margin. They will run rings round the opposition. What’s their future? They’ll double in size at least, probably more."

Michael Lavelle, head of capital markets origination at Citigroup, goes further: "This is not just the best management team in their sector, but really one of the best management teams I have ever had the privilege to work with in my 20 years in the City. When you look at the value they have already created, their scale, their market shares, the intelligence, the drive and then realize that these individuals are still humble and incredibly hard working, the growth upside they have is extraordinary. It is a phenomenal business."

Emmanuel Gueroult, co-head of European ECM at Morgan Stanley, says: "Not only did this company operate like a FTSE100 company long before it was even listed, there are quite a few of its business division heads below Glasenberg that would be very capable chief executives of FTSE100 companies."

Clearly these executives, business savvy, financially sophisticated, smart and determined, knew how to do a deal.

In August, after surveying the wreckage of the European IPO industry in 2011, Euromoney pulled together the thoughts of the best and brightest on how to do transactions in such tough market conditions. Recommendations were many: engage early with investors; establish use of proceeds to the benefit of new investors rather than a cashing-out exercise for existing owners; sort out corporate management teams and governance; take control of banks in large syndicates and clearly allocate roles; be wary of over-allocating to hedge funds; don’t get drawn into the trap of frequent communication on the size and quality of the book; don’t pay big discretionary fees to banks for maximizing proceeds; and delay paying fees until after initial turnover subsides and a deal has bedded down.

Glencore ticked most of these boxes. It was also innovative on structure in an effort to tap every source of potential demand for a big deal in a jittery market. It had a large cornerstone tranche of investors including sovereign wealth funds, high-net-worth individuals, hedge funds and long-only institutions, a new structure in a European IPO borrowed from Asia. It secured immediate index inclusion in the FTSE100 to draw in index trackers and undertook a secondary listing to get Hong Kong retail on board as well. And it all went extraordinarily smoothly. At a time when other IPOs were being pulled or postponed, Glencore completed one of great size for a little-understood company.

Yet from the jaws of success, it still nearly snatched a defeat. How?

As fear took over

Glencore’s $10 billion IPO was always going to be the most talked about deal of 2011 whatever the outcome. Plenty of sceptics had warned against buying shares from the smartest traders in the commodity markets, saying that if these guys were selling maybe commodity prices had peaked. But it wasn’t just commodity prices that peaked even as the deal closed, more worryingly it was the stock markets. The deal was done just as the rally in financial markets bought by the Federal Reserve’s quantitative easing a year earlier faded and fear took over once more from greed.

Even four months after the Glencore IPO closed there is no clear answer to the key question: was it a triumph or a disaster? The company can only wonder what might have happened had it priced the deal 10p or 20p cheaper and whether that would have helped it to perform better through the stock market storm.

"It wouldn’t have made any difference at all," says one of the company’s bankers.

Others do have suggestions though. A banker on the fringe of the deal says: "They could have priced it at 510p and kept more support but maybe they were victims of their own success. When the results of the cornerstone process were published, like everyone else we were taken aback, not just by the fact that they were starting a $10 billion deal with $3 billion of demand already in the bag, not just by the range of types of investors but by the sheer quality of the names prepared to take huge slugs of shares at whatever price across the range they chose. It was the government of Singapore and Abu Dhabi; it was Och-Ziff and Eton Park; it was BlackRock and Fidelity."

He continues: "Then after they were fully subscribed on day one of the book-building, they might have overestimated the quality of the final book and not realized how flighty some of that money was. The tier-1 accounts were in but maybe not in quite the size for a blow-out and there were a fair few hedge funds. Because the market believes one day this company will bid for Xstrata, many hedge funds are looking to go short Glencore and long Xstrata."

Another source says: "I wish they had zeroed more accounts." By that, he means the global coordinators and the company, after all the work to get investors to submit orders, should have allocated zero shares to many in the book and been more careful to identify and more fully allocate only to a smaller core of committed, tier-1, long-only accounts. One banker says as many as one-third of investors who submitted bids for stock received no shares.

Hedge funds accounted for 30% of demand in the book and were together allocated 22% of the shares. Why didn’t the company and its banker zero more of them?

A banker who worked on the deal says: "Because then, if Glencore just allocated to 30 or so long-onlys, everyone would have said ‘well why did you waste all our time with this huge roadshow’." He adds: "The book was the book and it was well subscribed, with quite a lot of price sensitivity from 520 to 530 and 540, and plenty of people telling us at what price they would be likely to go out and buy more shares in the after-market."

But the book had come together and investors were saying this just as a market panic was taking hold. Glencore was lucky. If the deal had been scheduled to complete one or two weeks later, it might have failed. Plenty of investors that bought the IPO will be consoling themselves that they have shares in a great company. But they will be cursing their decision not to wait and buy later.

Maybe Glencore and its bankers were presented with an extraordinarily difficult call: how to scrub down hard-won demand in a collapsing market as they would for a likely blow-out in a hot market with many inflated orders. The bankers, Glasenberg and the rest of the Glencore deal team closeted in their Park Lane hotels in the last days of marketing didn’t, apparently, agonize long over any of this. With an initial price range from 480p to 580p, the fall-back plan was always to price bang in the middle. One banker recalls Glasenberg at the 11th hour asking a potential investor whether he could price at 535p instead of 530p and getting the answer: "Don’t be a dick." Not all investors quite share the bankers’ awe at Glasenberg.

In the end, says Thomas Gottstein, deputy head of investment banking for Switzerland at Credit Suisse: "The very strong demand that Glencore enjoyed really made the pricing and allocation decisions relatively straightforward. The demand was such that many investors were disappointed with how much their orders were scaled back."

Maybe Glencore and its bankers should have agonized a little more.

But by the time the deal priced, they could have been forgiven for thinking they had a good read on investors and the markets. This was not a company trying to convince a new audience of a highly optimistic valuation. Many of the investors had met senior and divisional Glencore managers three or four times in the preceding two years. They had gone past initial misconceptions of the company when, in the words of one source, "there seemed to be this cartoon image of Ivan as some kind of Blofeld figure stroking his cat in his secret lair". They had gone through the process of breaking the company into rough thirds and establishing valuation metrics for each: one-third industrial assets, mainly mines; another third Glencore’s holdings in listed and private companies, notably Xstrata; a final third its marketing business, the hardest to understand and value, and the most intriguing.

In the process of explaining itself, the company had planned to build lasting relationships with financial investors comparable to those it maintains with more than 7,000 commodity suppliers and 9,000 customers in its operating businesses.

One banker says: "Glencore management see this process as one of opening up their partnership and drawing in new partners that just so happen to be public equity investors. They genuinely want investors to do well out of the IPO, just as investors in the pre-IPO convertible did well. Partly it’s an ego thing. They want others to enjoy success but also to know that they owe it to them."

A little history

Ivan Glasenberg and the Glencore management team understand a thing or two about creating shareholder value. In 1994, Glasenberg and a handful of others bought the company from its founder Marc Rich in a management buyout widely reported to have been priced at $600 million. Seventeen years later when they came to undertake an IPO, those partners were handed a range of external estimates on the company’s value anywhere between $54 billion and $66 billion. The average consensus valuation was $61 billion. The company applied a 5% discount to this and used that as the top end of the wide initial pricing range for its IPO.

So while its share price fall since the IPO in May is disappointing, a market capitalization of $47 billion in late September 2011 provides a reminder that disappointment is relative.

In the 10 years preceding the IPO, while growing the company at a mouth-watering compound rate, Glencore management achieved an average annual return on equity of 38%, ranging from 16% at the lowest to 61% at the highest.

The IPO completed in May 2011 had become inevitable when the firm placed a convertible bond to establish a public market valuation for Glencore in December 2009 that then put the company’s worth at $37 billion. The path was then set.

The intention to undertake an IPO at all had taken years to emerge out of a need to establish permanent capital for the private partnership.

While Rich made his fortune marketing and distributing commodities produced by other companies, even before the MBO in 1994 the company had already bought its first industrial asset and its appetite to own producing assets, primarily mines, grew with each passing year. Even though the company has been profitable every year since the MBO in 1994, the strategy of building up industrial assets presented a growing problem.

Simply trading or marketing other people’s commodities requires a lot of working capital, much of it short-term and secured financing, but not so much permanent equity. Owning large industrial assets requires lots of permanent capital. However Glencore, as a private partnership, had to allow retiring partners to withdraw their equity and the prospect of a generation of senior partners eventually withdrawing large slugs became daunting and a growing concern to the ratings agencies. Maintaining investment-grade ratings is crucial for the efficient financing of the marketing and trading sides of the business.

The firm tried to establish new tranches of private capital; it asked partners to defer certain payouts and experimented with structuring some retained interests to be paid out in instalments as a kind of loan to the company. None of this resolved the issue.

It became increasingly obvious to the senior partners that they needed permanent capital and their initial idea for establishing this was through the takeover of an already publicly listed entity. There were exploratory talks in 2007 and 2008 with Xstrata, the London-listed mining group originally spun out of Glencore and with which it retains strong operating links, board-level ties and a large shareholding. However these talks foundered.

Any takeover deal would require approval in a vote of other shareholders from which Glencore itself would be excluded. Because Glencore’s minority position was seen to have ended the interest of Brazilian miner Vale in lodging its own premium bid for Xstrata in 2008 its shareholders might not have felt well disposed to Glencore. Then at the start of 2009, with the financial crisis in full swing, when banks were collapsing and pulling credit lines, Xstrata decided to remove any creditor concerns that it might breach covenants by raising new equity through a rights issue. Glencore disliked the idea intensely. It saw no need for the rights issue, had better uses for its money in buying other assets in a distressed market but didn’t want to give up its rights and see its ownership diluted.

To forestall all this, it sold its stake in Prodeco, a thermal coal operation in Colombia, to Xstrata and used the proceeds to subscribe to the rights issue. Xstrata shareholders were concerned that Glencore had sold them a pup. In the event, Prodeco turned out to be an excellent business as Glencore had maintained it would be. In fact so confident was Glencore in Prodeco that it had retained an option to repurchase it that Glencore duly exercised, leaving Xstrata shareholders angry once more, this time that the pup had been bought back.

In reality, the Prodeco deal was collateral for Glencore to borrow the money from Xstrata to subscribe to Xstrata’s own rights issue at a time when Glencore’s CDS spreads were widening and doubts were creeping in over its own access to bank credit.

A veteran corporate financier and long-time adviser to Glencore grimaces: "These related-party situations are always pretty uncomfortable."

After all this, Glencore and its advisers could only conclude that Xstrata would not vote a deal through with Glencore for anything short of an extortionate premium. Glencore doesn’t pay those. "For a so-called acquisition machine, I’ve never seen it in a public auction or pay a premium," says one banker. "Come to think, I’m not sure I’ve ever seen it buy an asset a banker has advised it to."

Rather than backing into Xstrata, Glencore settled on its second-choice way of raising permanent capital: do an IPO.

Only the senior partners of Glencore will know how heated and divisive the internal debate over this was. It is rumoured that Glasenberg himself was no great fan of the IPO idea. The company has to adjust to greater public scrutiny for example of acquisitions in countries unsettled by internal conflicts with dubious governments. This is how the company has thrived. It doesn’t compete in public auctions with other large mining groups to pay a premium for tier-1 assets in comfortable jurisdictions. It buys in the Democratic Republic of Congo, Kazakhstan, Colombia.

Building a fan club

Glencore retained two of its core banks, Citigroup and Morgan Stanley, to do a pre-IPO convertible as a means to establish a valuation for Glencore as a public company to demonstrate its viability as a merger partner to Xstrata’s shareholders. Spring 2009 was not a good time to do an IPO and sell a 20% or more chunk of the company at a depressed valuation. Instead the convertible deal was now redesigned to be a true first step towards an IPO and was marketed not to traditional specialist convertible funds but rather to a range of equity investors, including sovereign wealth funds, long-only institutional investors and sector specialists. The thoughtful and investor-friendly approach the company took established its rules for engagement with public markets.

The aim was to demystify the company and establish an initial valuation for it among high-quality investors. Several of those that bought the convertible in December 2009, including GIC from Singapore, BlackRock, Fidelity and Chinese gold-mining company Zijin, would later become cornerstone investors in the IPO in May 2011.

Meetings between potential investors and both senior executives and divisional management at Glencore took place over the second and third quarters of 2009. Terms were agreed after the summer and the deal was finally completed just before Christmas 2009.

In the period between agreeing terms and executing the deal, market sentiment turned abruptly positive and Glencore would have been able to strike a much tougher bargain with convertible buyers.

"Yes there was a value transfer to investors," says Lavelle at Citigroup, "but Glencore was more focused on building long-term partnerships than a specific dollar valuation, even though they believed it was worth a lot more. It was a private deal and Glencore had shaken hands on it, and they were comfortable in leaving some cash on the table."

The pre-IPO convertible established a fan club of investors in Glencore. It took some work though. One source recalls the first meeting with BlackRock: "BlackRock asked us if they should bring their financials analyst. There was still this perception that Glencore trades commodities like Goldman Sachs or a giant hedge fund with a vast room full of traders dealing in derivatives. It does a little of that but what the marketing division mainly does is grade and transport bulk commodities around the world through a vast network of ships and storage facilities while making sure it captures a premium price whenever one appears. I told them: ‘You’d be better off bringing your logistics analyst’."

Over the three-year course of preparing for Glencore’s IPO, bankers learned how the company’s management team relies on relationship management in its key operating businesses. "If Glencore were an investment bank, it’d be the best in the business," says one. The company readily transferred this approach to dealing with investors. The typical conversations bankers overheard Glasenberg and his team engaged with during roadshows provided some insight, especially into the little-understood marketing side of the business that distinguishes Glencore from other miners.

Mark Echlin, co-head of the global industrials group at Credit Suisse, the third global coordinator of the IPO, says: "A typical transaction at Glencore would be that it will have agreed to ship coal from, say, New South Wales in Australia headed for delivery to a customer in India. Say that two or three days into the journey, a premium price for that cargo suddenly emerges from a customer in Japan. Glencore will redirect it to capture that premium. However, they will make sure that the buyer in India will not lose out by either redirecting another cargo or knowing that its Indian customer is happy to take delivery a week later. The client knows Glencore will see it right and it will take delivery of the coal it needs.

"Glencore has great and long standing relationships with thousands of buyers of commodities as well as producers. It has been dealing with many of these buyers for 10 years or more and some for 30 years. And you would not believe the seniority of Glencore executives that will spend time calling the purchasing manager at a middle-sized industrial buyer. Their customers and suppliers know that Glencore will fulfil their orders, no matter if there’s a flood in Australia, a tsunami in Japan, or a war in the Middle East. It doesn’t ask for get-out clauses.

"But if a premium appears and Glencore’s marketing division doesn’t capture it, senior management will want to know why."

Unique culture

The IPO process afforded investors a sense of this relationship-management approach and bankers a taste of the intelligence-gathering prowess Glencore deploys in covering the commodities markets in search of valuable premia. It also showcased the unique culture of the company shared among a cadre of long-serving partners and employees.

There was no formal starting gun for the IPO process, no request for proposals to banks and no pitching for roles. Because Glencore depends so much on bank facilities for working capital, it has strong relations across a big group of more than 90 banks. It used the IPO partly to reward many of these banks with fees for their commitment to the company over many years. It waited to pay out well past the end of the stabilization period almost two months after the deal started trading amid high volumes, as banks inside the syndicate and outside competed to establish market share and the stock price fell off. "They would have been within their rights and within market precedent not to pay us very much at all," reports one banker. "But they paid us very fairly."

For the banks going into the IPO, however, pitching how great they were to Glasenberg and Kalmin was a waste of breath. One source says: "There is a let’s-get-on-with-it culture at Glencore where people prove their worth by doing rather than by talking. Unlike banking, where you might do four years at Citi, four years at Morgan Stanley, four years at Deutsche, at Glencore you either get spat out after three months or you stay for 30 years. There’s usually a way for investment banks to gather intelligence about and even influence decision-making from different factions within corporate clients. But at Glencore there’s almost no chance of this. There are a few top decision-makers and their decisions are pretty much final. Once they give you a role, you had better stick to it. Glasenberg will listen to you and if he hears a good idea he won’t care if it comes from the most junior person in the room or the most senior. But you’d better not waste his time bullshitting about the value of his company or your own capabilities."

Glencore relied most on Citigroup and Morgan Stanley in the run-up to going public and later added Credit Suisse as a third global coordinator. Bank of America Merrill Lynch made the latest run at a lead role, after identifying Glencore as a key client following the merger of Bank of America and Merrill Lynch in 2008, and was named a joint bookrunner on the IPO along with BNP Paribas. Beneath these five, Barclays Capital, Société Générale and UBS were named co-bookrunners.

JPMorgan and Deutsche Bank, leading banks to the sector, were disqualified since they were house brokers to Xstrata. Goldman Sachs tried but had no long-standing relationship with the company. "I don’t know how many calls Glasenberg had to field from Lloyd Blankfein and Richard Gnodde," smiles one banking rival. "Give Goldman credit for trying but this was a deal where the company rewarded its long-standing providers. It wasn’t going to screw them so there was no point pitching a low fee."

Through 2010, banks began to assume that the IPO was coming and, knowing that Glencore likes its banks to feed them ideas, rather than ask them for advice, began to offer suggestions. "So we were saying things like: ‘If you were to do a Hong Kong listing this is what you might need to a consider. These might be the issues around a London listing.’ Glencore might ask one specific question to each of 23 banks but not rely on any one to construct the whole thing, so for a banker it feels like the client you’re dealing with is hugely well informed and you’d better only come to them with your best and most valuable ideas."

From the lead-up to the pre-IPO convertible in 2009 to attracting cornerstone investors to the IPO in spring 2011, Glencore mastered building relationships with key investors. One banker recalls: "We’d be saying: ‘Have you approached such and such in the Middle East or this investor in Asia?’ And Glencore would tell us: ‘Yes thanks, good idea, we saw them last week.’"

He adds: "Investors in the convertible had been the top end of Xstrata’s share register and a who’s who of investors in mining and metals. Glencore then translated that into a $3.1 billion order book for the cornerstone tranche of the IPO that had to be scaled back. We were all surprised by the quality of names and the size of orders. How much of that was down to the banks? Probably less than they’d like to take credit for. A lot of those relationships are maintained directly by the company with investors as principals to principals."

That doesn’t mean it was an easy ride. The whole investor education process threw up a key issue for the deal. Investors could easily value Glencore’s holdings in stocks of other miners, although there was some debate around whether a premium should attach to the influence these stock holdings give Glencore over doing business with these suppliers or a discount if the company had to sell those blocks. Similarly, there were obvious comparables for putting valuations on Glencore’s own industrial assets. But valuing the marketing business was much trickier.

Put them in chains

Investors struggled with various inputs to valuation models. They understood that Glencore hedges price risk on most cargoes. It is not punting prices on a screen. It does take some positions but its trading value at risk is low given the size of its balance sheet. Rather it is moving physical commodities around the world. It doesn’t much care whether it is transporting a barrel of oil, a bushel of wheat or a ton of zinc, it just wants to transport lots and use its intelligence network to capture premia. But there are many unknowns, including not just what the company might be transporting three months from now and how tight markets might be but also freight rates, three, six or 12 months forward.

Investors could see one thing clearly. This is a business with a special culture that depends on the key people running it. Investors wanted to see them locked in at the IPO. They weren’t taking much cash off the table immediately and that was good. Investors also wanted assurance that they would hold their stock for a number of years after flotation.

By this point, structuring the deal was getting complicated. FTSE100 index inclusion required a 50% free float a year after launch. The cornerstone investors wanted lock-ups and might have felt they had a strong bargaining position. They were telling Glencore that they would be good for very large orders, ranging from $100 million each at UBS and Pictet on behalf of a handful of high-net-worth individuals, through $215 million for Fidelity and $360 million for BlackRock, up to $400 million for GIC and $850 million for Aabar. These orders were guaranteed and cornerstones would accept pricing anywhere along the initial range from 480p to 580p.

They were all very comfortable at the bottom of the range, rather less so at the top. The company took care that the cornerstones should not be able to identify one another and negotiate jointly. But there was an unwritten understanding that Glencore would not screw these investors by pricing right at the top of the range.

The lock-ups preventing cornerstone investors from selling expire after six months, in November. Five-year lock-ups were established for board-level executives such as Glasenberg and Kalmin, with four-year lock-ups for the heads of the operating business in each of the main commodities and two-year lock-ups for more junior managers.

The buried bombshell

On May 4 Glencore published its prospectus. It is 1,637 pages long with comprehensive reports on many of its industrial assets. Investors rushed to page 34 where they found the initial price range from 480p to 580p. The bombshell was waiting for them way down on page 310. Cornerstone investors had already been signed up for $3.1 billion of the deal, leaving just $6.9 billion left to bid for.

It seems extraordinary that Glencore and its banks should succeed in creating an impression of scarcity around such a big deal. This was mostly incremental not competing demand. Sovereign wealth funds tend not to buy big strategic stakes in IPOs. But there was talk that some might buy yet more shares through the book-build and a few duly did.

At the end of the very first day of 14 set aside for marketing, Glencore and its banks had secured orders to cover the entire transaction at the bottom of the pricing range. "It was simply unprecedented for a deal of such size," says Gueroult at Morgan Stanley. The lead banks duly notified the markets that the book had been covered. It was to be their only public comment on the state of the order book. Two days later, at the end of May 6, it was within a fraction of being twice covered: job done, almost.

On the same day that Glencore published its prospectus, commodity markets, starting with silver and other metals, notably aluminium and nickel, and soon spreading to oil, had begun to sell off. By the end of marketing, leading metals had fallen between 3% and 9%, with coal down 3%. The leading index of mining and commodity stocks did worse and lost nearly 7% through the marketing period, driving down the value of Glencore’s holdings in other listed companies.

But orders kept coming in. Within a week, the deal had generated $28.8 billion of demand at the bottom of the price range and was even twice covered at the middle of the range at 530p. Even as markets outside the book started to fall, bankers noted that investors did not pull orders. So they did what bankers do when handed a book full of demand. They looked at the price-sensitive orders and began talking investors up, pointing out that with the book covered and allocations likely to be cut back, investors would need to pay a higher price if they wanted a piece of Glencore. It was almost as if, following the extraordinary and surprising success of the cornerstone process, the deal was now happening in a separate world of its own.

On May 16, having pushed up price-sensitive orders, the book was nearly three times covered at 530p, with just over $40 billion of demand at the bottom of the range. Glencore and its banks now modified price guidance to between 520p and 550p and, with the book 4.2 times covered at 530p, closed it a day early. The deal priced at 530p and began trading on May 19.

It opened up above 545p, dipped back to issue price and settled for a couple of hours at 540p. Copper was selling off. There were some weak economic numbers out of the US. Specialist mining-sector investors seemed to be in wait-and-see mode that day. Long-only investors held steady but hedge funds began to sell and towards the end of the first trading day selling accelerated and brought the stock back down to a closing mid-price of 530p.

In Europe, you don’t tend to get the same kind of big first-day pops as in US IPOs, but by any measure this was disappointing.

But not as disappointing as the share price since. Glencore touched a low of 348p on August 19 during the worst of the equity market rout. Its levels started to rise again after a good half-year earnings report in late August.

Nevertheless by late September, Glencore stock had sunk nearly 22% since the IPO, while the FTSE100 index had dropped only 15.5%. However, the company was at least outperforming the diversified mining sector (down 29% since Glencore’s IPO), commodity traders (down 23%) and several peer group stocks with which it is often compared, including Anglo American (down 25%), BHP Billiton and Xstrata (both down 27%). It has underperformed Rio Tinto but that company’s shares have been boosted by a buy-back programme.

And while Glencore and its bankers might be right that pricing it a little cheaper would have made no difference to what happened in the weeks and months that followed, they can only wonder what momentum the stock might have garnered had it been priced at 510p in a nod to the markets’ nerves and finished up on its first day.

Unfortunate timing

And even before the stock got caught up in the market sell-off in the summer, its debut was confirmed as a damp squib on June 13 when Glencore released a first-quarter interim management statement. This was an unfortunate legacy of some public Eurobonds the company had outstanding that required a quarterly disclosure. These numbers are not a particularly useful guide to the likely full-year result. They contained some disappointing news from Xstrata that the equity markets had not yet picked up on.

Most irritatingly for Glencore, the analysts at banks in the IPO syndicate, which submit reports to be fact-checked by the company, were still in their post IPO black-out period. Therefore the consensus earnings that the company appeared to miss were drawn from the estimates of a handful of analysts outside the syndicate who might still have been looking backward at the earlier part of the year when commodity markets were booming.

Just before the IMS announcement on unlucky Monday June 13, Glencore shares stood at 525p. Two days later they hit 475p.

Kalmin at Glencore says: "There were no first-quarter consensus numbers in the market as the connected analysts had only projected on a full-year basis. On the industrial side, one couldn’t just take the first-quarter number and multiply by four as we’re going through a production expansion phase in copper, gold, coal, oil, etc, which, all things being equal, would produce a better second-half result.

"Furthermore, we had to make the first-quarter announcement during a period when connected analysts were still restricted and therefore had not been able to update their full-year numbers for a few months, despite some commodity prices having come off."

This comes across as a little naïve. There was a consensus even if it was not one based on analysts’ reports that the company had approved. The timing of a first results announcement with syndicate analysts still blacked out was certainly unfortunate. Various elements of the deal structure, including a retail offering in Hong Kong that ultimately delivered very little, had built some inflexibility into the timetable.

Indeed one source tries to lay blame at the door of the British royal family, saying that the whole book-building process for the IPO had to be put back to May because most of the UK was closed down at the end of April for a long weekend encompassing both a traditional bank holiday and the marriage of Kate and William. "The corporate brokers at our firm are a different breed," sighs a source at one syndicate member. "Most of them were invited."

If the deal had been completed earlier, the eight syndicate analysts might have been through their black-out period and could have set a more realistic consensus. It was a banana skin waiting to be slipped on.

Glencore’s spending spree

It is now down to Kalmin and the rest of Glencore’s management to makes sure this episode remains a mere footnote in the history of its IPO. Swiftly, the company has rewritten its announcement calendar to follow the traditional pattern of FTSE100 companies, with only half-yearly results including full P&L breakdown. Glencore will no longer reveal Xstrata numbers ahead of Xstrata itself. The company has brought in a new head of investor relations, the previous incumbent having apparently been burned out by the IPO process. Kalmin and his colleagues have also spent a lot of time with investors since the half-year numbers in late August.

The company has not been slow to use the IPO proceeds. Some $2.2 billion will go to boosting its ownership of Kazakh zinc producer Kazzinc from 42.3% to 93%; $5 billion will go on capital expenditure on production-boosting projects. It has agreed to spend $475 million on a 70% stake in a big copper-mining project in Peru; it is buying out minority interests in Minara, its Australian nickel producer; it has declared its interests in a South African coal miner.

"This is what Glencore does," one banker says. "When other miners feel the financial pressure, rather than turning to the banks for help, they will often turn to a trusted partner and marketer of their production. Falling share prices and tight bank credit are perfect conditions for Glencore."

Is there a chance that investors who bought in the IPO and have kept faith will be rewarded?

One banker says: "The difference between them and the other big miners is this. The miners are mostly engineers and the question becomes which is best at building mines. Glencore have plenty of good people who build mines for them and get stuff to the gate at competitive cost. But above them they have these highly commercial people, who are expert at capital allocation, that are not sentimentally tied to one commodity over another, that will sell assets at a good price and put the money where the returns are higher, that will use industrial assets to bolster the marketing operation."

The investors his bank put into the IPO will be hoping he is right.