***SPOTLIGHT: Glencore has moved to keep cash in company

Glencore’s move to prevent shareholder funds leaving the company when traders and management depart is shown in its latest results presentation for investors, which MB has seen

Glencore’s move to prevent shareholder funds leaving the company when traders and management depart is shown in its latest results presentation for investors, which MB has seen.

The trader and producer, which is likely to launch an IPO before 2013made a net profit of $2.7 billion in 2009, down from $4.8 billion in 2008 on lower commodity prices.

Shareholder funds grew to $16.7 billion from $15.4 billion in the same comparison.

The company raised $2.2 billion in a convertible bond issue in December. Investors in Glencore bonds have been concerned in the past about shareholders’ funds leaving the company with the departure of management and key traders.

The capital structure the company has put in place over the past eight years should be seen in this context, market observers said.

“Glencore has put a structure in place since 2002 so that the company would slowly build up cash that couldn’t be taken out by shareholders when they leave,” one source said.

Till 2002 all holders of Glencore equity were ordinary profit participation shareholders (PPS), entitled to be paid out the value of their shares in tranches over five years.

But now, of total shareholder funds 80.3% — $13.4 billion — is locked up in such a way that when a holder of the equity leaves it does not in itself lead to a cash outflow.

By contrast, in 2008, only 27.4% of the equity — $4.2 billion — was tied up like this.

“Forty percent of profit seen by the company now goes into a pot that does not automatically diminish when somebody leaves the company,” a second source said.

The capital structure of Glencore is divided into four distinct types of equity, according to the results presentation.

Sixty percent of the equity is still held by ordinary PPS, the company said in the presentation, which MB has seen.

Such shareholders have their claims paid out over a five-year period once their employment is terminated, Glencore said.

But of the ordinary PPS 70% have agreed to have payment deferred or locked up till January 2012 at the earliest; 41% are locked up till 2013.

Another 15% of the equity is held by long-term PPS. Claims of such shares are foregone until certain “triggering events, such as an IPO” take place, Glencore said in the presentation.

The third type of shareholders — hybrid PPS, which account for 10% of the Glencore equity — are paid out over time and in coupons on their departure so long as certain covenants are met.

The final type of share, long-term equity, is held within the company. Employees cannot claim the value of this equity when their employment ends.

In the event of a sale, merger or IPO, holders of all four types of equity would be likely to exchange their shares for stakes in a holding company, which would then be sold or listed, observers said.

An IPO would give Glencore better and cheaper access to financial markets, the first source said.

“There is a need for financing for trading, and a need for financing to expand existing projects,” he said, noting that trading companies Trafigura and Vitol were also looking to raise money in the bond market.

“It’s easier to raise cash if you’re listed than if you’re not. And it has to happen before 2014 when the convertible bond expires. Investors bought that bond because they wanted a stake in Glencore, not because they wanted the cash,” he said.

Glencore’s identity as a trading company would not necessarily suffer following an IPO, he argued.

“There’s a fear it would be less aggressive and entrepreneurial but look at Xstrata. It is an aggressive and entrepreneurial company although it’s listed,” he said.

But there is also a chance that the trading operations of Glencore will be spun off after a sale or IPO, he said.

“The trading operations give them [the new owner] strong market intelligence but it’s also a possibility that it could go in a separate MBO or IPO,” he added.

The results also show that income from Glencore’s energy products business group overtook the metal & minerals division last year.

In 2009, 57% of its $4.1-billion income before interest and other costs were taken out came from energy products, while 32% came from metals & minerals.

In the previous year, metals & minerals provided 49% of its $7.1 billion, while 40% came from energy products.

The other business group — agricultural products — made 11% in both years, the company said in the presentation, which MB has seen.

Glencore declined to comment.