SHARES in Rio Tinto fell more than 6% following an announcement by the Australian miner on January 8 it was discussing a combination of its business with Glencore.
In contrast, shares in Glencore were 7% higher.
“The share market tells you what you want to know. Investors are not happy with this. And it’s just a bit of a U-turn strategy,” Atlas Funds Management chief investment officer, Hugh Dive told Reuters.
“A couple of months ago, the CEO [Simon Trott] was claiming he was going to keep things very simple, and now he’s just reversed track with a complex acquisition which the market does not like,” said Dive whose company is invested in Rio Tinto.
Trott said last year Rio would streamline the business in the $5bn to $10bn sale of non-core assets, and focus on implementing $13bn in iron ore expansions as well as the firm’s lithium projects.
Merger discussions between Glencore and Rio Tinto are thought to have taken place in late 2024 but were thought to have been kiboshed by Jakob Stausholm, Rio’s former CEO. His concern was the disparity between corporate cultures of the two firms, according to market speculation.
That issue emerged again today. “The biggest question mark would be the culture of the two companies as Glencore clearly has a trading background, is very opportunistic and results-focused, some of those aspects of their culture could actually be good for Rio,” said Argo Investments’ senior portfolio manager, Andy Forster.
Rio Tinto is also avowedly out of thermal coal to which Glencore has massive exposure. According to RBC analyst Kaan Peker, Glencore would have to divest of the coal assets. “Reintroducing coal exposure definitely is unacceptable to a significant proportion of Rio shareholders, particularly in Europe,” he said.
Both Rio and Glencore have said in their announcements that discussions are about “a possible combination of some or all of their businesses”, raising the prospect of some nuance in the final structure.
Jefferies analysts said one possibility was that the companies could merge their iron ore and coal businesses as an Australian-listed entity “… that would likely trade at a relatively high valuation if it delivered its strong through-cycle cash flows to Aussie shareholders via franked dividends”.
The two groups’ base metals businesses could then be separately listed and “would probably trade at a premium to most other miners due to commodity mix, asset quality and growth,” they said. However, that scenario could have problematic tax implications and would be difficult to structure, Jefferies’ analysts said.
In the end, the success or failure of any tie-up between the companies would turn on the details. “I hope Rio stays disciplined but it makes sense to look at deals where value can be extracted by both parties,” said Forster.
“We eagerly await more comments and details from both companies but in our view, right now, no premium can be paid whatsoever. Rio has unquestionably the stronger assets and we need to be compensated for that dilution via those synergies not paying them away,” said John Ayoub, portfolio manager at Wilson Asset Management.
Said Allan Gray analyst Tim Hillier: “There is a risk (Rio) could overpay. It comes down to price, but if they have to pay a big premium there is a risk that a transaction could destroy some value for shareholders.
“I like the concept of going to copper, but the record is dreadful for the big majors making acquisitions or even mergers,” said Dive. “We’ve seen a lot of these big mergers occur at the top of the market. And they end up being very dilutive over time.”
There’s shades of the BHP and Billiton merger 20-odd years ago, which ended up being an absolute heist, where the Billiton assets are worth very little now, almost nothing.”
