Glencore Has Hedge Funds in Mind in Equity Sale
Why is Glencore raising $2.5 billion in equity? One reason: it should allow the miner and commodities trader to avoid offering shares to its existing investors, usually required by pre-emption rights under U.K. rules.
Glencore, thanks to a special resolution at its annual shareholder meeting, can issue up to 10% of its equity without needing to offer shares to all investors. At the current market value of about $27 billion, that means it should be able to raise $2.5 billion, even after any offering discount, without tripping pre-emption rights.
That is why Glencore didn’t commit to a rights issue Monday. The company said it was keeping all options open for raising the money. That could mean placing the equity with a large strategic shareholder, like a sovereign wealth fund, or a select group of investors. It could also mean an offering of mandatory convertible debt.
Glencore’s management team has committed to underwriting 22% of the equity issuance. But, under some scenarios, public shareholders could find themselves forcibly diluted.
That would be an odd, and likely unpopular, move. But Glencore may be eyeing another option. It could do what is known as an “open offer” where all shareholders get the chance to buy shares but can’t sell their entitlement on, as in a right issue.
Glencore could then place any stock not taken up with hand-picked investors. This may have another advantage for Glencore’s management, who evidently feel under siege: it would mean hedge funds that have been shorting Glencore’s stock can’t buy newly-issued shares at a discount to close their positions.