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Glencore International AG, the world’s largest commodity trader, will buy back a Colombian coal unit from Xstrata Plc, setting the stage for an initial public offering that may value the trading company at $35 billion.

Baar, Switzerland-based Glencore, which had until yesterday to exercise an option to buy the Prodeco coal assets, will pay $2.25 billion plus profits accrued by the operations and cash invested by Xstrata, it said today in an e-mailed statement.

“Glencore pulls off another good deal, buying prized Prodeco assets at a very attractive price considering the quality of the assets, the development potential and favorable coal markets,” Miriam Hehir, a credit analyst at RBC Capital Markets in London, said today. Regaining Prodeco is “value- enhancing in the event of an IPO,” she said.

The trader sold its first convertible bonds in December, saying the debt can be exchanged for shares if it holds an IPO. The bonds give Glencore a so-called pre-conversion equity value of $35 billion, it said at the time. The company may hold an IPO in the fourth quarter, Liberum Capital Ltd. said in a note.

An IPO by the business, renamed Glencore after management bought former fugitive U.S. financier Marc Rich’s interest in Marc Rich & Co. in 1994, would end more than three decades of the company operating as a closely held partnership.

Glencore sold Prodeco last year for $2 billion to fund its participation in Xstrata’s 4.1 billion-pound ($6.2 billion) rights offer. The final cost of buying back the assets from 34- percent held Xstrata will be about $2.7 billion, Liberum said.

‘Bank Lines, Disposals’

“We understand the purchase will be funded from cash and undrawn bank lines, and that Glencore plans to partly replenish its liquidity in coming months, including cash from potential disposals,” Alex Herbert, a London-based Standard & Poor’s analyst said in a report today. “For Glencore, we view this transaction as being broadly neutral to its credit profile.”

Carlos Perezagua, a Glencore spokesman in Baar, declined to comment on the possibility of any asset sales.

Zug, Switzerland-based Xstrata, the world’s biggest exporter of coal used in power stations, advanced 33 pence, or 2.9 percent, to 1,157.5 pence by 10:29 a.m. in London.

Credit-default swaps on Xstrata dropped 13 basis points to 133 and contracts on Glencore fell 2 to 167, according to CMA DataVision prices at 9 a.m. in London, signaling an improvement in perceptions of credit quality.

Credit Perceptions

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a credit-default swap contract protecting against default on 10 million euros ($13.6 million) of debt for five years is equivalent to 1,000 euros a year.

Xstrata’s 2010 earnings per share will fall 2 percent following the sale of Prodeco, which is worth $3.9 billion, Nomura International Plc wrote in a March 1 report. Prodeco contributed 11 percent of Xstrata’s coal output last year.

The operation, combining two open-pit coal mines, port facilities at Santa Marta on the Caribbean coast of Colombia and a 40 percent stake in a railway, has saleable reserves of more than 250 million metric tons of coal, Xstrata said last year.

“Glencore will finance the repurchase in a manner consistent with its commitment to maintain its investment grade ratings,” the trading company said in the statement.

The trader is in talks with potential partners including Brazil’s Vale SA, the second-largest mining company, First Reserve Corp., Alpha Natural Resources Inc. and Government of Singapore Investment Corp., the London-based Times said Feb. 22.

“Although no partner is involved with Glencore in the purchase at this stage, we would not rule Glencore profiting from selling a minority stake in the Prodeco assets after the deal with Xstrata completes in the next few months,” RBC’s Hehir said. “Irrespective of partner involvement, we expect Glencore to retain investment grade ratings.”

source : bloomberg.com

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