Prologue
The company made headlines on Monday (28/09/15) when its shares fell by 30%.
Management made assurances to investors they are raising cash and selling assets to reduce its gross debt of $50bn, which is more than the company’s market capitalisation.
More: If you want to read my analysis on Glencore, the company, click on the link HERE. But today, we will be discussing Glencore biggest acquisition: Xstrata.
Before we begin, here is some background on Glencore.
Who is Glencore?
A business that trade hard and soft commodities, it also mined natural resources and in 2013 merged with Xstrata at a cost of $30bn for the 66% stake Glencore doesn’t own.
So on a 100% equity basis, Glencore values Xstrata’s stake at $44.6bn.
Today, the market value of Glencore and Xstrata is valued at $26bn.
Why have investors diluted the value of Glencore?
At the time of acquisition, Ivan Glasenberg says operational cost-saving would be $2bn.
But Glencore impaired $7.5bn of its assets and made a loss of $7.4bn in 2013. Also, the company paid out an extra $600m in interest costs from the previous year.
Gross debt in 2013 jumped to $55bn from $35bn.
It means that Glencore’s debt to equity is exceeding 100%, which adds financial risk if company’s profits can’t cover their capex, dividends and debt repayments.
Glencore’s Xstrata problem
However, Glencore’s management is no better than (previous) management at BHP Billiton and Rio Tinto. Both of which did acquisitions and share buyback at the wrong business cycle.
For example, Rio bought Alcan for $38.1bn in 2008 but was forced to write off $25bn of its Alcan’s assets!
At the time of the purchase, Alcan had revenue of $30bn in revenue and $2bn of earnings.
BHP Billiton made the same mistake in 2011 when it bought Petrohawk (a gas company) for $12bn (debt + cash offer). In the end, they had to write-off $5.8bn of Petrohawk’s assets. At the time, BHP was paying 18 times Petrohawk’s EBITDA.
Both Rio and BHP has written down between 66% and 48% of its investments respectively. Meanwhile, Glencore has written off 17% of Xstrata’s assets.
But, will there be further writedowns from Xstrata?
Xstrata – the business
Xstrata’s four main…
