Rio Tinto Shoots Down Glencore Merger Chatter

Rio Tinto (RIO: NYSE) had quite a day on the New York Stock Exchange yesterday. Opening for trade at $ 48.28, it touched an intraday high of $56.82 after a Bloomberg report said that a merger with Glencore plc (GLEN: LSE) was on the cards. The Rio Tinto stock closed off the day’s high at $51.47, but nevertheless up 9.12%.

Rio Tinto PLC Price Chart

Bloomberg claimed in its article that Glencore was “laying the groundwork” for a potential $160 billion merger with Rio Tinto (RIO) that would create the world’s largest mining behemoth.

Bloomberg quoted people familiar with the situation as a source of its information, but also clarified that according to these people, “no talks are underway between the two companies, no formal offer has been made, none is likely before the end of 2014, and Glencore could decide against an offer.”

Glencore nixes ‘speculation’

A statement from Rio Tinto said much the same thing.

“The Rio Tinto board confirms that no discussions are taking place with Glencore,” said the company. “In July 2014, Glencore contacted Rio Tinto regarding a potential merger of Rio Tinto and Glencore. 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.”

“The board’s rejection was communicated to Glencore in early August and there has been no further contact between the companies on this matter,” clarified the statement.

Why the merger makes sense to Glencore

The Bloomberg article nevertheless pointed to several factors that justified Glencore’s merger proposal.

Rio Tinto produced nearly 140 million tons of iron ore in the first half of 2014, with underlying EBITDA of $ 8.09 billion, and iron ore is the missing metal in Glencore’s massive resource portfolio.

Iron ore prices have crashed by over 40% in recent months following oversupply from large new mine capacities, and slowing demand from China. Canny Glencore CEO Ivan Glasenberg may well have figured that this could be an opportune moment to acquire iron ore assets – at the same time catapulting the combined company to the very top of the global mining league.

The fall in iron ore prices, and the knock-on effect on the Rio Tinto stock, which was down 11% in 2014 in London on October 6, make the merger transaction that much cheaper.

Glasenberg might also be looking at synergistic operations that mesh Glencore’s huge trading infrastructure with Rio Tinto’s resource assets. Glasenberg is also well-known for achieving merger savings – according to one research report he was able to extract C$ 2.5 billion in synergy costs from the Xtrata transaction – five times what was projected when the deal was done.

Bloomberg’s sources also said that a leadership battle in the merged company was unlikely given that Sam Walsh, Rio Tinto’s current CEO, is scheduled to retire by the next year.

The sources said, however, that Glencore was unlikely to take its offer hostile, and that it would primarily comprise stock and some cash.

Building pressure on Rio

Despite Rio’s denial, the fact is that the chatter in the media could help build pressure on Rio’s board, particularly if the iron ore operations continue to feel the heat from a slide in global prices.

It is well-known that resource markets are facing a double whammy – a rapidly strengthening dollar on the one hand, and slowing demand from major economic zones such as China and Europe.

Bloomberg also said in its article that Glasenberg had taken his case to Aluminium Corporation of China, which is the largest shareholder in Rio, and held discussions with the Chinese state-owned company in recent weeks.

Given Glasenberg’s track record on acquisitions, he may not be willing to take no for an answer.

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