[miningmx.com] – IT’S debatable whether Glencore’s merger proposal to Rio Tinto, made public by the Australian miner today after its share price leapt, will develop into a fully-fledged corporate battle.
Given that Rio Tinto’s board unanimously rejected Glencore’s merger offer in July, the Swiss-based miner and trading firm has either the option of persuading shareholders it can run the assets better, or launch a hostile takeover bid.
What analysts believe is a certainty, is that Glencore is not done. “Ivan Glasenberg [Glencore CEO] is not going away,’ said a UK analyst. “He has made an approach and he will come back.’
“It depends on the share ratio,’ an analyst in London said. “If you think iron ore has further to fall and copper in Glencore could rise, then Glencore outperforms Rio and the share ratio moves in their favour, making it easier to offer an all-share with premium bid,’ he said.
“With no premium, it has to be friendly. And I can’t think of a case where management and the board of a target company have rolled over saying: “You’re right, you’ll manage it better than we will’’, he said.
According to Investec Securities in London, shares in Glencore were cheap compared to Rio Tinto which was trading at multiples of 10.9 and nine for the 2015 and 2016 financial years respectively. These are marginally above Glencore’s multiples of 10.2 and 8.4 despite the latter being “a much more diversified business’.
“It would be difficult for Glencore to go hostile,’ said Hanre Rossouw, a fund manager for Investec Asset Management with Cape Town. “Rio shareholders will demand a proper premium which will be tough for Glencore to fund as they are smaller.
“A share deal would thus see significant dilution of Glencore holders,’ he said.
Yet some analysts think the possible combination of Glencore with Rio Tinto progress. “A deal could still happen eventually,’ said Investec Securities in the UK adding that the potential for a deal seemed to be “in the hands’ of shareholders, Chinalco in particular.
Chinalco owns 9.8% of Rio Tinto, but it has seen its investment in Rio Tinto halved in the six years it has owned it. The investment, incidentally, was part of Rio Tinto’s defence against a $127bn bid from BHP Billiton.
Bloomberg News quoted Evan Lucas, a markets strategist at IG in Melbourne as saying the approach to Chinalco was “very savvy’, but he added that China may object to Rio Tinto’s significant iron ore assets going to a market trader “… who already has massive positions in coal, copper, zinc, nickel and other commodities’.
The deal is a somewhat counter-intuitive one, however. At a time when smaller is better – such as BHP Billiton’s proposed $14bn demerger for instance – Glencore is bulking up, adding to its dominance in coal with iron ore assets one analyst said “are arguably the best in the world’.
“Glasenberg’s strategy would be that iron ore prices are likely to stay low well into next year,’ said a UK analyst who believed time was on Glencore’s side. “He’ll also be thinking these are very high quality assets that are easy to expand and without many regulatory problems,’ he said.
“Glencore is a great fit for Rio Tinto. Regulators would have little to worry about and we reckon a deal could go through quite easily,’ said SP Angel, a UK stockbroker.
“Shareholders should be allowed to say what happens in Rio and might well feel better value could be determined under Glencore’s leadership,’ it said.
Perhaps not all shareholders would agree. “You would need all shareholders on board for this,’ said an analyst. “It might be relatively difficult to do because some fund managers are deeply suspicious of the business model at Glencore,’ he said.
