Rio Tinto has shot down a potential Glencore merger after the Swiss miner approached it in July.
There have been reports circulating that Glencore was eyeing off a potential Rio Tinto merger in recent weeks. If the deal was closed it would be the world’s biggest mining company with a huge portfolio of diversified commodities. More on that here.
Rio Tinto today confirmed it was approached earlier this year but said “no discussions are taking place”.
“The Rio Tinto board, after consultation with its financial and legal advisors, concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders,” the company said in a statement to the ASX.
The board’s rejection was communicated to Glencore in early August and Rio said there had been no further contact between the two companies on the merger matter.
However, Glencore is reportedly still doing the maths on a potential merger next year but there would be some significant hurdles to jump including regulators in London, Australia and China as well as Rio’s management.
“The absolute mountain they’d have to climb from a regulation side would be gigantic,” IG Markets analyst Evan Lucas told Business Insider.
“They were approached once it doesn’t mean they wouldn’t do it again,” he said, adding he was reluctant to say the deal wouldn’t get up but it would be very unlikely.
The Australian Financial Review reported corporate advisory firm Standard Chartered had done some preliminary work on the deal for Glencore.
According to a Bloomberg report Glencore had recently “reached out” to Rio’s largest shareholder, Chinese state-owned Chinalco, to test the waters on a deal. Chinalco holds a 9.8% stake in Rio and could be seen as a supportive party on the deal especially after it failed to secure a seat on the miner’s board.
The Swiss trading giant has also reportedly been sounding out other Rio shareholders.
Glencore has in the past been vocal about a joint venture between the two companies’ coal operations in the NSW Hunter Valley.
At the company’s preliminary results presentation in March, Glencore chief Ivan Glasenberg was asked about a possible joint venture between Rio Tinto and Glencore. Rio Tinto owns the Mount Thorley Warkworth coal mine which is adjacent to Glencore’s Bulga operations in the area.
“It’s clear, everyone knows it in the Hunter Valley there’s a lot of synergies between us and Rio Tinto in their Hunter Valley assets. There’s a lot to be done. We can get substantial synergies,” he said.
“We’re talking to Rio Tinto but it takes time for both sides to assess each other’s assets. But it’s something we look at. We’ve been talking to them for a long time. How far we’ll get and how soon we can reach an agreement, I don’t know. But it’s something that clearly makes a lot of economic sense.”
But all this speculation could be a diversion tactic with the AFR reporting “sources said no talks are underway between the two companies, no final decision has been made and any formal approach would not take place this year”.
Talks of merger activity sprung up after an analyst note from Berstein Research was circulated last month. The note said that the deal made sense because Rio is the world’s lowest cost iron ore producer and is relatively cheap.
“A Rio Tinto-Glencore combination would create market leading positions in iron ore, copper, nickel, zinc and coal as well as significant optionality around a number of lesser metals and minerals,” Bernstein said in a note. “Moreover, it would create the biggest and most diversified mining company on the planet.”
Berstein also argued it would be a more aggressive growth strategy for Rio shareholders.
“In a combined portfolio there is a sense in which current Rio shareholders would get the best of both worlds. They get both the growth optionality that comes with the Glencore portfolio as well as Glencore’s conversion of the Pilbara into the most prodigious cash machine that the mining world has ever seen,” the note said.
The drop of the iron ore price below $100 a tonne has taken Rio’s market value with it, falling 12% this year to about £56 billion ($AU102.7 billion) compared to Glencore’s market cap which has increased by almost the same amount to £45 billion ($AU82.6 billion), Bloomberg said.
But the fall of iron ore, by about 40% this year, puts Rio in a weaker negotiation position which means its management would probably reject the deal.
Iron ore generates about 80% of Rio’s revenue and its persistent price weakness could make it the right time for Glasenberg to move on a deal with Rio, especially as the commodity weighs on its share price.
Bloomberg reported the merged miner would be worth about $185 billion.
It also said Rio’s management would be keen to ensure its executives held key roles in any merger situation, unlike what happened when Glencore bought out Xstrata in a $29 billion deal almost two years ago and threw out most of its management team.
But according to IG Markets analyst Evan Lucas it could all be a diversion tactic – a case of look over here while they strike a better deal over there.
#GlenTinto ls a look over here! while a better deal is done over there! smashed up share prices & commodity price will bring more deals
— Evan Lucas (@EvanLucas_IG) October 6, 2014
Lucas told Business Insider with iron ore entering ex-growth, especially as China slows, “there’s no doubt” a number of deals will be done over the next three months.
“Expansion and production ramp ups will only get you so far,” he said, adding, “which means you’ve got to look for scale.”
“I would be certainly interested to see a Fortescue takeover because it’s [an iron ore] pure-play.”
Rio shares were trading up 3.61% at $59.67 on the ASX a short time ago.
There’s more here.