Glencore CEO Approached Rio Tinto Chairman on Possible Merger
Rio Tinto Says It Rejected Glencore’s Takeover Bid
Glencore GLEN.LN -1.19% PLC Chief Executive Ivan Glasenberg made a personal approach to Rio Tinto RIO.LN +4.90% PLC Chairman Jan Du Plessis over the summer and had a “conceptual” conversation about a possible merger of the two mining giants, according to a person familiar with the situation.
The conversation was “sufficiently serious” that Mr. Du Plessis took it to the Rio board, this person said.
Rio Tinto said it recently rejected a takeover proposal from Glencore. Sam Walsh, chief executive of Rio Tinto, right, speaks as Jan du Plessis, chairman, looks on during a news conference in Melbourne, Australia in May. Bloomberg News
Rio Tinto said earlier Tuesday that a deal with Glencore wasn’t in the best interests of shareholders, and there had been no contact on the proposal with the commodities producer and trader since early August after the approach in July.
Investors were questioning if—and if so, when—Glencore might make another move for Rio. A person close to Glencore refused to rule out a second approach.
Glencore has been vocal about its desire to expand its reach through “opportunistic” mergers and acquisitions after it completed its takeover of Xstrata PLC in May 2013 to create a company worth US$66 billion at the time. It bought Africa-focused oil producer Caracal Energy Inc. for US$1.35 billion in April.
Iron ore—which accounts for the majority of Rio Tinto’s earnings—is one of the missing pieces of the puzzle for Glencore, which produces and sells commodities ranging from copper and zinc to grains and cotton. “Glencore is in every other commodity market in a reasonable way, so in that sense it isn’t that surprising,” said Donald Williams, Sydney-based chief investment officer for Platypus Asset Management.
At the moment, Glencore has only three iron-ore assets, all in Africa and all at project-stage, so it is not yet producing iron ore for its traders to sell. Its marketing arm does, however, trade iron ore from other producers to “a geographically diverse customer base,” it says on its website.
The terms of the initial proposal remain unclear, though. Without details on Glencore’s hopes for the tie-up, it is impossible to know whether a merger makes commercial sense, investors say.
Spokesmen for both companies declined to comment on details of their talks.
“A merger or takeover among large entities like this is certainly a tricky thing,” particularly in terms of ensuring both shareholders and regulators are satisfied, said Angus Gluskie, managing director of White Funds Management, which owns Rio Tinto shares.
Barclays BARC.LN -0.71% estimated the merged company would have a market value around US$157 billion.
For now, Rio’s top ranks appear to be making it clear they aren’t interested. The company said in a statement it believes investors are better off under the stewardship of the company’s existing executive team.
“Rio Tinto has made significant progress in refocusing and strengthening its business,” Chairman Jan du Plessis said. “Rio Tinto’s shareholders stand to benefit from the very considerable value that this will generate.”
Still, shares in the company rose 4.3% in Sydney trading.
Iron ore remains highly profitable for miners including Rio Tinto, which are ramping up production in a bet that their enormous efficiencies of scale will allow them to profit, even though prices have fallen sharply since the start of this year.
Glencore would become the world’s second-largest iron ore producer-after Vale SA VALE5.BR -0.13% if it bought Rio Tinto, while potentially boosting the profitability of the trading business that remains core to its operations. It could also help get Rio’s ore to China more cheaply by combining the iron-ore miner’s extensive network with Glencore’s marketing clout, at a time when rival BHP Billiton Ltd. BHP.AU +1.65% has pledged to supplant the Anglo-Australian company as the world’s lowest-cost producer of the raw material.
Glencore Chief Executive Ivan Glasenberg has been critical of the way iron-ore miners have aggressively expanded their Australian operations, consciously dragging prices sharply lower. Prices have fallen by more than 40% this year, to less than US$80 a ton, on rocketing supply from Australian mines.
It isn’t just Rio Tinto’s iron ore that Glencore appears to have its eye on. Glencore earlier this year signaled an interest in a potential coal-mining joint venture with Rio in Australia’s Hunter Valley, a move Mr. Glasenberg thought could improve the economics of both their operations at a time when coal prices have been languishing near multiyear lows.
Glencore says it is dedicated to coal in the long-term and, in partnership with Sumitomo Corp. 8053.TO -1.03% , has already acquired Rio Tinto’s majority stake in the Clermont coal mine in eastern Australia. It is the world’s largest exporter of thermal coal, used in electricity generation. Rio remains a major coal producer in volume terms, though it is now a small contributor to the company’s earnings.
Glencore’s proposal is somewhat out of step with its rivals.
Its takeover approach was made at a time when other major resources companies are moving to simplify their businesses. BHP Billiton Ltd., currently the world’s No. 1 miner by market value, is planning to spin out unwanted assets including nickel mines and aluminum smelters so that it can focus on four commodities. That does, however, include iron ore.
It isn’t just in mining that companies are looking to slim down. Corporate giants across all sectors have been carving off business units at a near-record pace, according to data provider Dealogic.
While Mr. Glasenberg has previously assured his own investors he won’t grow “for growth’s sake,” he’s indicated he’s keen to sweep up good assets his rivals no long want, particularly those that can feed into Glencore’s trading arm.
Still, investors and analysts don’t think Rio Tinto would go quietly. The company said Tuesday the approach had been unanimously rejected by the board and analysts say they think it would take a substantial offer from Glencore to change their mind.
According to Liberum Capital, Glencore would need to pay a premium of at least 25% to get a deal across the line.
Some analysts believe a formal bid could face regulatory concerns in Australia, where Rio Tinto mines most of its iron ore and has a listing on the country’s stock exchange. Australia’s Foreign Investment Review Board will approve deals only if they are considered to be in the national interest. Chinese authorities may also raise concerns over its control of mining assets in markets like copper and coal, they say.