Glencore’s Glasenberg bides his time on Rio Tinto
Ivan Glasenberg is not a chief executive short of opinions. But for the past six months, he has been uncharacteristically silent on one topic.
In October, Glencore, the company he leads, revealed that an informal merger approach to its larger rival, Rio Tinto, had been rebuffed some months earlier.
Under the provisions of UK takeover law, the revelation started an important clock ticking: Glencore was barred from further discussing the Anglo-Australian mining group for a full six months — a period that expires next week.
Will Glencore return with another approach to Rio? A combination of the second and largest miners by market value would create a $130bn resources group with an unprecedentedly broad exposure to a range of raw materials.
It would also be a decisive way to try to fight the gloom in commodity markets, where prices continue to soften amid concerns about slowing growth in China. But six months on, there are few reasons to think Rio shareholders would be interested in merging with a smaller rival. “Glencore still needs Rio more than the other way around,” said Ben Davis, analyst at Liberum.
It was immediately clear in the aftermath of October’s revelations that, for Glencore to pull off a deal, many stars would have to align. So far that has not happened. While the price of iron ore, the source of about 80 per cent of Rio’s earnings last year, has slumped to its lowest level in decade, the company has managed to increase its dividend, launch a share buyback and cut its debt.
This has helped support Rio’s share price and means that Glencore is no closer to solving the main obstacle to any deal: the fact that Rio remains a bigger company.
“The likelihood of a deal being announced in the near term remains unlikely,” said Jeff Largey of Macquarie Bank in London.
When Mr Glasenberg called Rio chairman Jan du Plessis to pitch the merger idea, the Glencore/Rio share ratio was around 9:1, that is, the price of a Rio share was equal to about nine of Glencore’s. That widened to 12:1 in January as the price of copper, Glencore’s most important commodity, slumped. It is now just under 10:1.
“We still wouldn’t even expect the possibility of a bid till the share ratio gets to below 8:1. Even then I don’t see where there is a sweet spot that gives enough premium for Rio shareholders and is not too dilutive to Glencore shareholders,” said Mr Davis.
Institutional investors are largely content with the job Sam Walsh, Rio’s chief executive, has done in pruning costs and cutting spending, even if some have reservations about his strategy of pumping more iron ore into the market, in an effort to keep market share and drive higher-cost producers out of business.
“Mr Walsh has shown that he can and will cut costs,” said Michael Hulme of Carmignac Gestion, a fund manager.
The relatively weak performance, which analysts attribute to Glencore’s debt levels, is not the only reason a fresh approach looks unlikely. Glencore’s triple B credit rating could be in jeopardy if it attempts a major deal this year.
Furthermore, Rio remains resolutely opposed to a combination of the two businesses. Mr Walsh told an audience at Chatham House in February that even if Glencore could come up with an offer that was attractive for Rio shareholders, a merger would never happen because it would not clear regulatory hurdles.
“The interesting thing is that, the media are sort of infatuated with this, and I guess it’s because it sells newspapers or gets people watching TV or what have you. But as I move around investors, investors say: ‘I don’t get it. Why are you giving this any ear? Because it actually isn’t going to happen’,” he said.
But for Mr Glasenberg, the attractions of a deal remain. Not only would it create the world’s biggest resources company but Glencore would get access to Rio’s balance sheet and its Australian iron ore assets, widely acknowledged to be the best in the industry.
Yet the steelmaking ingredient, which plunged 50 per cent in 2014, has extended its losses this year on concerns about a supply glut and currently iron ore languishes below $50 a tonne.
It means Mr Glasenberg’s best option is to remain patient.
“Glencore is content to let the iron ore price continue to fall and put further pressure on iron ore miners,” says Mr Largey. “Rio’s balance sheet remains solid but further weakness in iron ore prices will weigh on its valuation and affect the way investors feel about the company.”