GlenTinto: A merger of equals?

There’s a mass of conjecture today after a report from Bloomberg broke the news that a tie-up between Glencore and Rio Tinto is on the cards.

Rio Tinto
Source: Bloomberg

The mooted ‘GlenTinto’ would see the largest mining company in the world created, along with instant scale for the likes of Glencore. Its trading and commodities business would see 330 million tons of iron ore added to its books, with a target of 360 million in the near future.

Rio has responded by releasing a statement that is was approached in July and promptly rejected the proposal.

Market talk speculates that Glencore is in discussions with Chinalco, Rio’s largest shareholder (around its 9.8% stake) – which looks to be a very strategic decision, considering Chinalco’s concern around Rio’s board and leadership.

Glencore is chasing Rio’s clean balance sheet. With its substantially lower debt and high-quality asset portfolio, the merger does make strategic sense from Glencore’s perspective. Rio may also see some merit in the deal, as it would mitigate its over-reliance on iron ore. A merger on the capital-cost front would be substantially cheaper than re-diversifying through acquisitions.

However, GlenTinto would have to climb a massive regulatory mountain to get the deal done. The BHP-RIO merger from 2007 was scuttled by the Chinese regulator in 2012 due to price concerns. Although we are at the bottom of the cycle here, the same price issues will surface.

The Australian Foreign Investment Review Board  (FIRB) would also be running the ruler over this. Issues around fair value and whether this creates a firm that could be considered uncompetitive are also considerations. Given Glencore’s and Rio’s assets in Australia, it would probably be forced to sell out of certain assets – you only have to look what happened during the Xstrata deal to see this.

Rio itself is unlikely to agree to a zero-premium price and that also needs to be taken into consideration. Having suffered at the hands of a sliding iron ore price, Rio would argue that its structural reforms are not reflected in the market – changes that would be recognised come reporting season. At the very minimum, Glencore would need to meet fair value. According to Bloomberg, this is between A$67 and A$72.

This also brings up the next issue facing Glencore’s desire to merge – it doesn’t have the capacity to go hostile. Its balance sheet would be heavily stretched to meet Rio’s current size, let alone if it went to fair value or beyond.

In conclusion, therefore, the zero-sum offer looks shaky at best and a fair-value offer or more looks impossible. Ask yourself this - what does Glencore bring to the table that would entice Rio to accept? The simple answer is, ‘Not much’.

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