SHARES in Glencore trended down today reflecting the mixed response – though generally positive – among analysts to the Swiss group’s announcement that it had sold a minority stake in its agribusiness unit, Glencore Agricultural Products (Glen Agri), for $2.5bn.
The sale of a 40% stake in the business, to Canada Pension Plan Investment Board (CPPIB), is part of Glencore’s previously announced balance sheet restructuring plan in which net debt would be reduced to between $17bn to $18bn by the end of this year.
“The cash inflow would help reduce the size of the balance sheet, but on a net debt/EBITDA basis there would be only a minimal de-leveraging impact,” said Eugene King, an analyst for Goldman Sachs.
He calculated that the sale price implied an overall value on Glencore Agri of some $6.25bn which, set against debt in the unit of $600m, imputed an enterprise value to EBITDA of 9.3x to the business assuming Glencore’s 2015 financial figures.
“Given Glencore as a whole is trading on 9.5x 2016E EV/EBITDA on spot on our estimates, this would not be a material positive for spot valuation, in our view,” he said.
However, UBS compared the sale against Glencore’s earlier purchase of Viterra, a large component of Glen Agri, for $3.5bn. This implied a multiple of 11x EV/EBITDA on the 2012 financial year when the Viterra transaction was completed. Set against a EV/EBITDA value estimate of 13x for the whole business, the deal was accretive, it said.
“Although net debt reduction was the primary driver of the proposed sale, it contrasts favourably with mining peers (e.g. Anglo), where asset sales are generally being made at lower multiples and discounts to net present value or capex spend,” said UBS.
Ivan Glasenberg, CEO of Glencore, described the transaction represented “the next stage” and that it was “well positioned to benefit from long-term global macro and sector trends”.
He described CPPIB as having “… a proven track record in the sector”. CPPIB “… share our vision for the future growth of the business through value-creating organic and inorganic growth opportunities for the benefit of all stakeholders”.
Citing RBC Capital Markets analyst, Tyler Broda, the Financial Times said the transaction was slightly disappointing from a valuation point of view, but it nonetheless took a positive out of the deal.
“It now ties in Glencore strategically with the CPPIB and will probably see a return to growth in this business sooner than previous expectations,” said Broda.
Shares in Glencore were 2.7% lower on the Johannesburg Stock Exchange in mid-afternoon trade. Anglo American and BHP Billiton – the only other large diversified shares on the bourse – were also lower by 0.48% and 0.63% respectively.
JPMorgan Cazenove said the sale of the Glencore Agri stake was “a better outcome” for the future value of shares in Glencore which would re-rate as its credit risks fell.
“Negatively however, the sale of 40% of Agriculture is higher than our 25% estimate, which would dilute our 2016/17E attributable EBITDA by ~$125m pa and attributable FCF by ~$100m pa,” it said.
Bank of America Merrill Lynch (BoAML) analysts said CPPIB’s deep pockets, potential low hurdle rate and long-term horizon in terms of realising value from the purchase were the chief merits of using “someone else’s money” to grow the business. “We note the ‘constructive’ language from both parties in today’s release as evidence that this could happen in time,” it said.
“Also included in today’s announced deal is a four-year lock-up to sell up to a further 20% stake in the business to CPPIB and also a clause where CPPIB can call for an IPO of the unit after eight year,” said BoAML. “We note that the key missing “piece” from GLEN’s agricultural business is a US presence,” it added.
Before the sale of Glencore Agri, the group had raised more than $9bn by suspending dividend payments, improving efficiencies and cutting corporate costs, selling assets as well as a $2.5bn share offering.
