Glencore nearer big deals as share lock-ups lift

The Glencore logo is seen on a sign in front of Swiss commodities trader Glencore building in Baar near Zurich January 5, 2010.

LONDON (Reuters) - Glencore (GLEN.L), the world's largest diversified commodities trader, will move a step closer to making the big acquisitions that motivated its record share listing when a first batch of lock-up clauses expires on Thursday, allowing the commodities trader to sell additional shares for the first time.

The company, which listed in May in large part to gain the firepower for more ambitious acquisitions, has said it sees opportunities amid battered valuations.

It has already been trying to gain control of South African coal miner Optimum (OPTJ.J) and has also bought out minority investors in Australian nickel miner Minara Resources.

But Thursday's expiry -- the first of a series of lock-ups on investors that will lift progressively over the next five years -- has revived market speculation about potential targets for share-funded deals, not least Xstrata (XTA.L), in which the group already owns a 34.5 percent share.

A sharp drop in Xstrata shares in September put Glencore's value at as much as 20 percent more than Xstrata at one point last month.

The gap has since closed and both are worth close to 26 billion pounds ($40.7 billion), with Xstrata marginally larger. In part, the relative drop in Xstrata was due to the difficulty of shorting Glencore stock, given the small free float.

"To me there is no question they want to buy Xstrata and both companies have said the current structure is not sustainable," analyst Nik Stanojevic at Brewin Dolphin said.

"Yes, the market is volatile but really it is about the relative value of Glencore and Xstrata.

"Xstrata has underperformed since the (Glencore) IPO, which makes Glencore probably more keen ... The fact that three results have passed, and the lock-up has now expired, it all makes it more possible than yesterday."

Glencore has also been subject to takeover rules blocking it from making an expression of interest in rival ENRC (ENRC.L) after it said in June that it was not actively considering a bid. That ends in mid-December.

RELEASING CORNERSTONES

Aside from its own shares, Thursday will also see the expiry of the lock-up clause tying in the so-called "cornerstone" investors, who poured $3.1 billion into Glencore shares at the time of the float. However, they have lost almost a billion dollars between them on paper as a result of the 29 percent drop in the share price over the past six months as markets tumble.

Although these investors, led by Abu Dhabi's Aabar, are unlikely to sell, the technical ability to do so means the shares can count toward Glencore's market freefloat, which rises from almost 12 percent to just under 17 percent and because the FTSE 100 index <0#.FTSE> operates in bands, Glencore will move up to a 20 percent band.

Some analysts have said that would create a technical "squeeze," as the freefloat will also increase Glencore's index weighting which means some index-tracking funds would need to buy more stock.

Glencore should already benefit from the gain after the next FTSE index reshuffle on December 7.

"Based on three-month average trading volumes of around 10 million shares a day and assuming the FTSE buying spread over 30 days, then FTSE indexing alone could increase volumes by 25 percent," analysts at Credit Suisse said

However, a bigger jump in the freefloat will come as staff lock-ups begin to expire in 2012.

Analysts at Liberum estimate the rise in the freefloat next May, when employee shares tied in for a year will be released from lock-ups, should boost Glencore's weighting from 0.25 percent of the FTSE 100 to 1.5 percent after the change.

"We believe Glencore should outperform over the next six months as its shares will benefit from a technical squeeze caused by a circa 500 percent weighting growth ... in the FTSE 100," Liberum said in a note on Wednesday.

Others, though, cautioned that employees who have seen wealth locked up in shares could also seek to pull out some cash.

"There is the possibility (they will sell). I don't see this perfect storm driving the price up," John McGloin, analyst at Collins Stewart.

(Editing by Greg Mahlich)