World’s largest company that you know nothing about

Back in the day I was in Switzerland and decided to take a closer look at Marc Rich’s operation. I took the train from Zurich to Zug where he had set up his headquarters in a glass building.

There was a coffee shop on the ground floor which served public and staff. I had a coffee and croissant. The price of the coffee and croissant was about the only information you could get out of Rich then. He was on the run from the United States authorities, on their top 10 most wanted list for fraud, racketeering, trading with the enemy (Iran) and tax evasion (the biggest case ever).

Rich never gave interviews and one of the business journals reported that he walked around with four Israeli-trained security staff carrying Uzzi machine guns just in case someone tried to grab him. He had made a ton of money as an apartheid sanctions buster, supplying oil to South Africa.

Founded in 1974, Marc Rich & Co became Glencore in 1994 after he was reportedly forced out by a management buyout after misreading the zinc market. But the secretive culture of the company that Rich created has prevailed. Very, very little information has been publicly available about what had, in the meantime, grown to be the world’s largest privately owned company. Much of the information available about Glencore, dubbed the largest company you’ve never heard of, has been anecdotal or even from the realm of lore.

But now Glencore is out in the open. The world’s most secretive company has released a 1 600-page prospectus as part of a joint listing of the company in London and Hong Kong. It is a company like no other. Owned by 480 or so of its employees, Glencore owns industrial assets and is a significant trader of metals and minerals, energy and agricultural products.

The prospectus says that Glencore’s management has more than 200 years of experience at Glencore, even though the average Glencorian is only 46 years old. The company trades or produces 90 distinct commodities through its own production or through contracts with third-party suppliers, being a significant player in many of these markets.

Its market share internationally for key products in its metals and minerals portfolio includes zinc (60%), copper (50%), alumina (38%), cobalt (16%), nickel (14%), ferrochrome (16%) and lead (45%). Its energy products division is active in coal (24%) and oil (3%). Glencore’s agricultural division has market shares that include rapeseed (26%), sunflower oil (20%), soybean oil (9%), barley (11%), wheat (11%), corn (4%) and sugar (1%).

Glencore, which is headquartered in Baar, Switzerland, recorded revenues of $145-billion in 2010 from operations in 40 countries. It directly employs 2 700 people and 54 000 indirectly. It uses a fleet of 203 ships to move its commodities and holds equity interests in 41 of these ships. Glencore famously invests where others fear to tread, including in the Democratic Republic of Congo, Kazakhstan and Colombia.

Its South African connections are greater than the role played by its founder — three of its key executives are South African, including Ivan Glasenberg, Glencore’s chief executive [see sidebar]. He has played a leading role since the management buyout and will be worth $9-billion when the company lists, making him the richest South African.

Glencore’s listing is said to be creating more billionaires and millionaires than even that of Google. Every one of Glencore’s 480 employee-shareholders will, on average, be worth $100-million. They will have to stay employed for five years to get this payout, at which time many are expected to leave.

One of Glencore’s challenges as it converts to a public company will be to ensure that new, capable people are hired and trained to replace those who are departing.

Glencore SA and Xstrata
Glencore’s South African interests are housed mostly in Xstrata, one of the world’s largest commodity companies, in which it has a 34% interest and which contributed $1,7-billion in income in 2010. Xstrata’s investments in South Africa include the mining and smelting of ferrochrome and the mining of platinum group metals and coal. Glencore also has a 70% interest in Shanduka Coal.

Observers believe that it is only a matter of time before Glencore and Xstrata merge. Xstrata proposed a merger of equals with Anglo American in June 2009, an approach that was rebuffed by Anglo. With Xstrata bedded down it can be expected that Glencore will bid for Anglo, a point noted by Anglo chairperson John Parker in an address to shareholders last month in London.

According to Reuters, he told the meeting: “I was brought into Anglo to defend it against a takeover on the cheap. I did everything to drive their tanks off our lawn and if someone else comes and parks their tank, they will get the same treatment.”

The report noted that analysts and investors have speculated that Glencore’s planned market debut next month could lead to a merger with Xstrata, with the enlarged group then turning its eye to rivals, including Anglo — a deal that could be the largest to date in the sector.

Glencore’s prospectus insists that it should not be compared with other commodity companies such as BHP Billiton, Rio Tinto and Anglo because it is less vulnerable to commodity cycles as its trading activities make a greater contribution to revenues than its industrial businesses.

The prospectus says that, although the Thomson Reuters Equal Weight Index fell 20% in the second half of 2008 following worldwide recessionary conditions, Glencore’s marketing arm produced positive net income for the same period.

A competitive edge
According to the prospectus the company’s competitors are “not generally set up to exploit the full range of value added and arbitrage opportunities” as Glencore is. It says that its advantages of scale, global reach and solid track record are significant barriers to market entry by competitors.

The fact that it is active in logistics and finance gives it a competitive edge. The Glencore business can optimise opportunities brought about by good or bad weather, by transport bottlenecks or failures, or by labour or production issues, which often cause global and/or regional tightness, leading to arbitrage opportunities. For instance, it is able to exploit arbitrage opportunities, including arbitraging its own commodities, which may arise from a train derailment, because of its ubiquity and detailed knowledge of markets.

Glencore is listing 20% of the company, raising $12-billion to up its investments in some of its key industrial companies and to reduce debt. Observers believe that it is cashing in at the top of the present commodity cycle and preparing a cash war chest for the future.

It has achieved an average return on equity of 38% for the past 10 years. Not surprisingly, there has been no shortage of investor interest and the available shares are fully subscribed.

While the company has had to meet stringent disclosure requirements to be able to list some observers are sceptical about its ability to transform itself fully from a secretive to a public company. Its active role in risky jurisdictions is too rich for some potential shareholders and critics note that it is embroiled in many environmental and governance controversies.

If it sounds as though the Glencore show is run by young people willing to take a punt on everything and anything, note that the prospectus says that in 2010 98% of all its purchase and sale agreements were hedged at predetermined rates. It says, too, that it gets political risk insurance where deemed prudent.

The global financial crisis saw Glencore’s revenues fall by 30% from $150-billion to $106-billion. It recorded impairments of $2,7-billion in 2008 related to the financial crisis but, given its huge exposure to commodities, it was able to weather the fallout relatively well.

Most reporting on Glencore’s listing has focused on the formerly secretive nature of the company, its extensive reach in the commodity business, the controversies surrounding it and whether or not it is a good investment opportunity.

Al-Jazeera, in contrast, positioned the company’s emergence from the shadows firmly in the context of rising commodity prices, including food prices. Global food prices are back to their 2008 peak, which sparked bread riots in parts of the Middle East, Africa and the Caribbean, al-Jazeera reported.

It noted that in April the World Bank’s food price index was up 36% on a year earlier. Al-Jazeera quoted Grain’s Devlin Kuyek, who estimates that Glencore, which, he says, controls 300 000 hectares of farmland, is one of the world’s largest farm operators.

As for Rich, he was pardoned by former US president Bill Clinton as he left office. The pardon, which has never been explained, is one of the most controversial, MSNBC reported, along with former US president Gerald Ford’s pardon of former US president Richard Nixon.

Writing in Salon, Joe Conason has said that Clinton was under great pressure from the Israelis to pardon Rich, the inference being that Clinton did this as a contribution to the Israeli-Arab peace process. The Israelis maintained that Rich had been doing invaluable work for them in the region because of his contacts with hostile leaders who they had no way of contacting directly.

Rich, though, has never been back to the US as a condition of the pardon was that he pay the $48-million in taxes arising from his illegal deals. So he received the pardon but kept the tax money. Just another Marc Rich deal?

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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