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Should We Follow the $15.5 Million Insider Purchase of Glencore's CEO?

June 08, 2012 | About:
It is often a very good sign when we see a CEO boost a stake in the company he/she manages. Warren Buffett often states that he likes management to use its own bonus or cash to buy the stock of the company for the market price. That means the executive is “truly walking in the shoes of the owners.”

That is the recent case for Glencore (LON:GLEN). Its CEO Ivan Glasenberg bought an additional 2.9 million shares at the cost of 344.3 pence a piece on June 6. The total purchase was 10 millions pound ($15.5 million). Now he is holding around 15.8% of the total company. His purchase was financed by a $110 million dividend payment from his shares in Glencore. He also stated that he would spend the dividend on additional stock, and this action was the first purchase in line with this plan.

Glencore is involved in the total value chain of the metals and minerals field. It has three main segments: metals and minerals, energy products and agriculture products. Previously, Glencore was the privately held partnership, with its staff able to share the profits according to a performance-based incentive scheme.

The company was listed with an offer price of 530 pence, valuing it up to $36.7 billion pounds ($59.3 billion). In February of this year, Glencore and Xstrata (LON.XTA) announced a $90 billion merger deal. The merger ratio was 2.8 new Glencore shares per each Xstrata share held. On the basis of the closing share price of Glencore at 460.75 pence in the beginning of February this year, the merger had valued each Xstrata share at 1290.1 pence and the entire to be issued share capital of Xstrata at around 39.1 billion pounds ($61.9 billion).

At the time of this writing, Glencore's share price is 362.33 pence. With the ratio of 2.8, Xstrata's share should be valued 1,014.52 pence per share, a 4.7% premium compared to the existing current price of 968.83 pence. So the share prices of the two companies are quite correlated with the terms of the merger. Even with the strong insider purchase, I would not think investors should get into Glencore alone with the current price. They might consider doing arbitrage of selling Glencore and buying Xstrata (at the current price) to profit from the gap in the 2.8 merger share ratio if the merger materializes.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


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