DEPARTMENT OF ECONOMICS AND FINANCE CHAIR OF FIXED INCOME, CREDIT AND COMMODITIES MARKETS GLENCORE PLC: DECODING A BLACK BOX SUPERVISOR Prof. Alberto Adolfo Cybo-Ottone CANDIDATE Alessio Maria Matteocci ID: 658281 CO-SUPERVISOR Prof. Nicola Borri ACADEMIC YEAR 2015/16 Index INTRODUCING THE BLACK BOX: A SNAPSHOT OF GLENCORE ................................................................................ 3 WHY SHOULD WE BE INTERESTED IN GLENCORE? .......................................................................................................... 3 Strategic Assets: extraction and production .................................................................................................... 5 Strategic Assets: storage, blending, processing and refining .......................................................................... 6 Strategic Assets: logistics and delivery ............................................................................................................ 7 Strategic Assets: conclusions........................................................................................................................... 9 PRODUCTS AND BUSINESS LINES ................................................................................................................................. 9 Metals and Minerals ..................................................................................................................................... 10 Energy Products ............................................................................................................................................ 11 Agricultural Products .................................................................................................................................... 12 Income Statement Breakdown ...................................................................................................................... 12 CONCLUSIONS ....................................................................................................................................................... 14 THE IPO: THE BIRTH OF A GIANT ....................................................................................................................... 17 GLENCORE PRE-IPO: WHY DID GLENCORE LIST? .......................................................................................................... 17 Did Glencore Need Additional Capital? ......................................................................................................... 18 THE IPO: LET’S GIVE IT A VALUE ................................................................................................................................ 22 Backward Engineering via DCF Valuation ..................................................................................................... 23 The Sum of the Parts Valuation ..................................................................................................................... 27 OVERVALUED OR PERFECTLY TIMED? ......................................................................................................................... 29 Luck or Skills? ................................................................................................................................................ 31 Luck or Skills: Glencore fundamentals ........................................................................................................................ 31 Luck or Skills: demand driven market and the BRICS role ........................................................................................... 32 Luck or Skills: the BRICS cool down ............................................................................................................................ 34 CONCLUSIONS ....................................................................................................................................................... 39 THE MERGER: GLENCORE & XSTRATA ............................................................................................................... 41 PRE-MERGER ........................................................................................................................................................ 41 THE DEAL ............................................................................................................................................................. 44 The Origination and the Target Selection ...................................................................................................... 44 Synergies and Benefits .................................................................................................................................. 45 Building a Global Commodities Company ..................................................................................................... 47 Ownership and board reconstruction ........................................................................................................................ 47 Vertical integration..................................................................................................................................................... 49 Glencore Xstrata: combined volumes and market positioning ................................................................................... 50 Why It Took Much More ............................................................................................................................... 60 THE SUM OF THE PARTS EXERCISE ............................................................................................................................. 61 Placing the Merger into the History of Commodity Deals ............................................................................. 61 The Sum of the Parts Valuation ..................................................................................................................... 62 POST – MERGER: GLENCORE’S RESTRUCTURING ............................................................................................... 66 A DISTRESSED BACKGROUND .................................................................................................................................... 67 The Commodity Industry and the Macroeconomic Background .................................................................... 67 Back to the Demand and Supply Lecture ....................................................................................................... 71 A DISTRESSED GIANT: FUNDAMENTALS AND GLENCORE’S “CONTROL” VARIABLES ................................................................ 73 A DISTRESSED GIANT: SHOCKS AND “EXOGENOUS” VARIABLES ......................................................................................... 74 Defining the Variables under Exam: selected commodities ........................................................................... 75 Page1 Quantifying Glencore’s Static Commodity Exposures .................................................................................... 76 Quantifying Glencore’s Dynamic Commodity Exposures ............................................................................... 77 The Kalman Filter Model ............................................................................................................................................ 78 Filtering the Rolling Betas ........................................................................................................................................... 78 Defining the Variables under Exam: time variant Merton default probability ............................................... 80 The Merton Model ..................................................................................................................................................... 81 An extended dynamic version of the standard Merton Model ................................................................................... 82 The Model Specification: a dynamic AR(1) – GARCH(1,1) Merton Model ................................................................... 83 Analyzing The Impact of the Exogenous Variables on Glencore’s Equity and Default ................................... 84 Commodity Exposures ................................................................................................................................................ 85 Implied Default Probability ......................................................................................................................................... 86 Default Dynamics and Relations ................................................................................................................................. 88 Comparing Results: Glencore vs Peers .......................................................................................................... 90 Commodity Market Exposure ..................................................................................................................................... 91 Financial Debt Position ............................................................................................................................................... 92 Profit Margins ............................................................................................................................................................ 93 COMPARING GLENCORE’S TARGETS WITH ACTUAL PERFORMANCES .................................................................................. 94 Glencore’s Announced