Companies & Mergers: “Bruised Rio Tinto rebuffs Glencore takeover approach,” Reuters

Glencore vs Rio Tinto
Glencore vs Rio Tinto: War of words or stormy courtship?

Rio Tinto has rejected a takeover approach from smaller rival Glencore Plc, snubbing a blockbuster deal that would have created a $160 billion mining and commodities trading giant. The company said on Tuesday that Glencore contacted it about a potential merger in July as the price of Rio’s most profitable product, iron ore, was heading toward five-year lows.

According to two sources familiar with the matter, Glencore’s billionaire chief executive Ivan Glasenberg telephoned Jan du Plessis, Rio’s chairman.

But there were no other talks, the sources said, and Glasenberg was turned down in August. Rio said there had been no further contact between the companies about a deal.

“The Rio Tinto board, after consultation with its financial and legal advisers, concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders,” Rio Tinto said in a statement to the Australian stock exchange.

Glencore declined to comment.

Market speculation about a potential Glencore approach for Rio has been simmering for weeks, fueled by the sharp drop in iron ore, the material which accounts for more than 90 percent of Rio’s profits. Industry bankers say Glencore has recently talked openly about wanting to take over Rio, coveting its low-cost, high-quality iron ore.

The rebuff may have ended the prospect of a deal in the short term, but Rio’s statement on Tuesday has failed to dampen questions about future deals for Glencore’s Glasenberg, one of the industry’s most ambitious dealmakers, including the potential for another run for Rio.

“This is the most obvious deal you could think of, especially if (Rio Chief Executive) Sam Walsh is on his way out. But the Xstrata experience shows it could take 3 years,” one of the sources said. Walsh’s contract runs until 2015.

Several sources familiar with the matter said Glencore, if it were to come back, would likely wait for iron ore prices to drop further and for the ratio between Rio’s shares and its own — the likely currency for a deal — to improve further.

Rio’s Australian shares jumped as much as 4.7 percent to a 9-day high of A$60.28 in a weaker broader market after the company issued the statement. Its London shares were up 4.7 percent at 3,139 pence, while Glencore was down 1.5 percent at just over 334 pence around midday.

“At this stage, nothing is going to change materially in the next six months, unless the commodity price landscape changes dramatically,” analyst Ben Davis at Liberum in London.

“The deal makes a lot of sense from a Glencore standpoint. They have a lack of long-term assets and are heavily leveraged. A big paper transaction like Rio could help.”


Iron ore would fill a gap in Glencore’s range of commodities, where it already has strong positions in copper, nickel, zinc and coal. Merging with Rio would provide Glencore with instant scale in iron ore, boost its trading business, and give the indebted company access to Rio’s balance sheet.

The two could save about $500 million just by combining their neighboring coal operations in Australia, Citi estimated.

But analysts and bankers have also outlined major hurdles to a deal, saying Rio Tinto shareholders would want a hefty premium, China would likely force a merged group to sell some copper and coal assets, and Rio’s conservative culture would clash with Glencore’s aggressively entrepreneurial DNA.

“I can see a lot of reasons why Glencore would want to do this. I can’t see many for Rio,” said one industry source.

The rebuff from Rio bosses could leave Glencore with the option of persuading shareholders directly, with a significant premium or cash. But investors said that would be difficult.

“I don’t think Glencore would go hostile and try and take out Rio. That would be a big bite,” said Jason Beddow, managing director of Argo Investments, the sixth-largest holder of Rio’s Australian shares.

Rio disclosed the approach after Bloomberg reported that Glencore had talked to Rio’s top shareholder, Chinese state-owned Aluminum Corp of China (Chinalco) [ALUMI.UL], to gauge its interest in a deal.

The report, citing people familiar with the situation, said talks with Chinalco took place after Rio’s rejection and that Glencore was testing the waters with other Rio shareholders — studying financial and regulatory obstacles as it weighed its next steps.

Any bid for Rio would need China’s blessing, as Chinalco owns 9.8 percent of the company, a stake it bought in February 2008 as it sought to block a $127 billion takeover bid from BHP Billiton. Chinalco is sitting on a big loss on its stake, bought for 60 pounds a share, or double Rio’s current London-listed price.

A Chinalco spokesman in Beijing did not answer telephone calls on Tuesday, which is a public holiday in China.


Analysts at Bernstein calculate for every dollar fall in the price of iron ore, Rio’s assets lose $1.5 billion in value.

Rio has focused on slashing costs while expanding its iron ore output to what it calls “epic proportions”, not shying away from the fact that it is largely dependent on steel growth in China, which is slowing.

“The board believes that the continued successful execution of Rio Tinto’s strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders,” Rio’s du Plessis said in a statement.

Unlike its bigger rivals, who have flagged they are going to stay away from chasing acquisitions for the foreseeable future following a string of soured deals, Glencore has been looking for bargains amid the commodities slump.

Analysts have pointed to potential expansion in upstream oil or agricultural commodities, as well as metals.

Following its $46 billion merger with Xstrata last year, it bought Chad-focused oil company Caracal Energy this year for about $1.3 billion and has been looking to buy BHP’s troubled Nickel West business.

With companies like Rio, BHP, Anglo American and Cliffs Natural Resources looking to sell assets, there is plenty for Glencore to choose from without having to pay up for Rio, said Ric Ronge, a portfolio manager at Pengana Capital.

“Glencore, if it’s got the appetite, can probably find a situation where it can get a lot more bang for its buck in terms of finding something that’s more stressed and has a better fit with their existing asset spread,” Ronge said.

“Obviously they’d like iron ore, but the question is at what price?”

(Additional reporting by Anjuli Davies; Editing by Stephen Coates, Ed Davies and David Clarke)

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