Glencore offers hope

Swiss commodity firm Glencore took a chance when it launched its IPO on April 14. Earlier that week, UK online payments firm Skrill had become the latest casualty of market scepticism towards listings when it cancelled its already downsized £110m IPO. And it was not just small, speculative deals that were biting the dust. Just a month earlier, Danish cleaning services firm ISS had given up on a US$2.1bn float at the last minute.

A significant fall in commodity prices just as bookbuilding began added to the challenges for Glencore, but bankers were convinced that the scale of the offering would attract attention and management would turn that interest into orders. They were right.

Glencore priced its IPO at 530p last week, right in the middle of guidance at launch of 480p–580p. The US$10bn base deal was US$7.9bn primary and US$2.1bn secondary and the issue of 1.1bn shares gave an initial free-float of 16.9%.

At the start of the week banks gave refined guidance of 520p–550p, a move that maintained momentum following the statement that the deal was covered on the first day. Such was the strength of demand that guidance could have been tightened around the top end at 550p–580p, but management understood they should not push too hard. There were few limits below 530p, which was issued as final guidance in the last hours of bookbuilding, and almost all of those investors increased their limits to remain in the deal.

The cornerstone tranche, which was included as a result of the secondary listing in Hong Kong, took 31% of the US$10bn base deal. When the book closed, the remaining US$6.9bn was well over five times covered – nearly six, according to one bookrunner – as investors clamoured to secure a stake in the FTSE 100 newcomer. The deal will rise to US$11bn if the all-primary greenshoe is exercised.

More than 900 different accounts participated, though many were left disappointed as over 100 received nothing, while the top 50 took about two-thirds of the deal. Those in the middle received “gesture allocations”.

An allocation call, which began at 7pm on Tuesday and was intended to be a brief chat about the top orders, ended up as a 13-hour marathon, indicating the difficulty of parcelling out the stock. Partly, this was a result of trying to estimate the amount of inflation in individual orders. One of the largest in the book was a US$2bn ticket from one private wealth manager, which was deemed unrealistic.

Orders were received from around the world including the UK, the US, Asia, the Middle East and Brazil. About 10% went to high-net worth individuals and private banking clients, about a third to hedge funds and the rest to institutions and sovereign wealth funds. Hong Kong retail took just 2.67% of the offering. The Hong Kong tranche was priced at HK$66.53, with trading to begin in Hong Kong this Wednesday.

Soft debut

Trading began on a conditional basis in London on Thursday. Index trackers were cut back in allocations to ensure natural buying up to the stock’s FTSE 100 weighting over the first few days of trading this week. But the first two days were a little rocky with the stock dipping to close at 524p on Friday, down 1.1% from issue.

An IPO of US$10bn is extremely rare in Europe. The last similar deal was the US$16.6bn IPO of Enel in 1999, so bankers were always nervous about the dynamics of the aftermarket. One bookrunner said the hope was for slow and steady progress.

“Investors have had such a bad year in IPOs that if the stock jumped, even by just 5%, many would take profits and create selling pressure,” he said.

Shares traded at around 540p for most of Thursday before trading down to close flat at 530p. By the end of the day an astonishing 553m shares had changed hands, representing 70% of the tradable stock, though bankers estimated only around one-fifth was client flow. Stabilisation was seen in the closing auction and on Friday as the stock slipped below issue price, but there were long periods where stabilisation agent Morgan Stanley was inactive.

There was surprise at the performance, but little criticism from informed observers. “It shows just how difficult this market is,” said a senior banker at a firm not involved. “It is a great achievement that they got the deal done and we will see how it trades over time.”

One banker involved pointed out that the shares had outperformed the Euro Stoxx on Friday.

For management the only disappointment will be the US dollar pre-money valuation achieved. This was the metric on which management was focused and a seven big figure strengthening in the dollar against sterling had a major impact. The 530p price, which originally implied a US$53bn valuation for the company, in the end valued it at US$49.2bn. All things considered, that was a minor fly in the ointment.

Citigroup, Credit Suisse and Morgan Stanley were joint global co-ordinators on the deal. Bank of America Merrill Lynch and BNP Paribas were joint bookrunners. (For the full syndicate see IFR 1883.)