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Rio Tinto confirms it rejected Ivan Glasenberg's Glencore takeover bid
Rio Tinto shares jump on rejected Glencore takeover offer
(about 5 hours later)
Rio Tinto held discussions over a possible takeover by rival Glencore this summer but rejected the bid for a possible $160bn (£99bn) combination, it has emerged.
Shares in Rio Tinto jumped more than 6 per cent as chairman Jan du Plessis declared Glencore had sounded him and his board out over a potential $160 billion (£100 billion) merger.
Today, Rio Tinto confirmed it had been approached by billionaire mining tycoon Ivan Glasenberg’s mining giant in July but rejected the offer in August and the pair have not spoken since.
However, the South African said the approach had been rejected and that no discussions were now taking place with Glencore.
Rio Tinto said: “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 issued its statement before the London markets opened today, following reports last night that Glencore had been sounding out its biggest shareholder, the Chinese state-controlled aluminium giant Chinalco.
Such a deal would have come little over a year after Glasenberg completed the merger of Glencore with Xstrata – a takeover that created a business then worth $66bn. It would have easily leapfrogged BHP Billiton to become the world’s biggest mining company.
It emerged today that the approach to the Chinese came after Glencore chief executive Ivan Glasenberg was knocked back in his merger offer by du Plessis and his board.
Glasenberg had reportedly sounded out Rio Tinto’s major Chinese shareholder about a deal. Whether they agree to start the ball rolling or not, mining industry executives pointed to Glasenberg’s legendary persistence.
Despite the jump in Rio’s shares, which gained 146.5p to 3143.5p, analysts and mining industry executives were not convinced a deal would happen, primarily citing Glencore’s inability to offer a premium to Rio’s shareholders.
“We’re talking about Ivan here,” said one. “We all know you can never bet against this man’s ambition.”
They pointed out that Glencore’s shares, virtually flat today at 337p, remain stranded way below its 2011 flotation price, while the company is seen as relatively highly indebted, hindering its ability to offer any more than an all-share merger.
Glasenberg’s deal with Xstrata took months of negotiations with major shareholders, particularly the Qataris. It eventually involved Glasenberg calling on Tony Blair to broker an agreement, using his Middle East connections, in the middle of the night at Claridge’s in London.
As one mining executive said: “The markets are all excited this morning and it all seems great, but they’re forgetting the obvious point — Rio holds all the cards and will not say yes.”
Reports of Glencore’s approach to Rio’s largest shareholder, Aluminium Corp of China, better known as Chinalco, emerged last night after the London Stock Exchange had finished trading. But Rio Tinto is so vast that it has stock trading on other exchanges. In New York, these rocketed more than 7 per cent on the prospect of a deal.
A further issue was the difference in risk profile of the two companies. Rio is seen as a relatively low-risk investment based on a massive share of the global market for cheaply produced iron from its vast Pilbara mines in Australia. Glencore, on the other hand, is a trading-led mining group with assets in racier parts of the world like the Democratic Republic of Congo.
Bloomberg, which broke the story, said no talks had been held formally between Glencore and Rio, although Glasenberg has made Rio bosses, led by chief executive Sam Walsh, aware in private that he would be keen.
“To swap shares in a low-risk company like Rio for those in a high-risk-high return outfit like Glencore, you’re going to demand a big price,” said one analyst.
Such a takeover would give Glencore access to Rio’s vast resources, including the prospect of exploiting its recently granted licence to mine for iron ore in Guinea, where Chinalco and Rio have just agreed a deal to explore the world’s biggest untapped iron resource, after years of squabbling with the controversial mining tycoon Beny Steinmetz.
On the other hand, some analysts said, Rio’s iron ore position leaves it stuck in a very low-priced commodity, fighting a price war with Chinese producers. Glasenberg, they said, would probably end that, crimp the output and try to drive up the price. Meanwhile, cost savings and synergies could be huge.
Even if iron ore prices do rise in the coming months, Rio would still benefit from “capital discipline” – keeping a lid on overheads and targeting only the more profitable operations, Bernstein Research said.
City bankers were hoping for a deal due to the fees bonanza from such a transaction. Glencore’s takeover of Xstrata, in January 2013, racked up fees of $114 million, according to Thomson Reuters.
A Rio-Glencore merger would create a business with market-leading positions in iron ore, copper, nickel, zinc and coal and be, as Bernstein says, “the most diversified mining company on the planet”.
Analysts suggested Glencore would have to pay a significant premium to Rio’s current £57bn stock market value, but that potential synergies behind a merged company could total $1.7bn.
However, Bank of America Merrill Lynch issued a report last night stating “six reasons why a deal is not on the cards”. These include: the difficulty of Chinalco being involved in a high-profile deal so soon after its general manager resigned under a corruption cloud; Rio’s shareholders not wanting to own assets in risky countries such as the Democratic Republic of Congo and Colombia; and the belief that Rio would demand more than Glencore would be prepared to pay.
