Rio Tinto has rejected a takeover approach from smaller rival Glencore Plc, snubbing a blockbuster deal that would have created a $160-billion mining and commodities trading giant.
Rio said on Tuesday that it was contacted about a potential deal in July, as the price of its most profitable product, iron ore, was heading towards five-year lows. Glencore confirmed later that it had made a telephone call to gauge interest in "some form of merger".
"Rio Tinto responded that it was not interested in pursuing these discussions,8" Glencore said in a statement.
"The Rio Tinto board, after consultation with its financial and legal advisors, concluded unanimously that a combination was not in the best interests of Rio Tinto's shareholders," Rio Tinto said in a statement to the Australian stock exchange.
Market speculation about a potential Glencore approach for Rio has been simmering for weeks, fuelled by the sharp drop in iron ore, the material which accounts for more than 90 per cent of Rio's profits. Industry bankers say Glencore has recently talked openly about wanting to take over Rio, coveting its low-cost, high-quality iron ore.
The rebuff may have ended the prospect of a deal in the short term, and Glencore said in its statement that it was no longer actively considering a bid. But both sides failed to dampen questions about future acquisitions for Glencore's Glasenberg, one of the industry's most ambitious dealmakers - including the potential for another run at Rio.
"This is the most obvious deal you could think of, especially if (Rio Chief Executive) Sam Walsh is on his way out. But the Xstrata experience shows it could take 3 years," one of the sources said, referring to Glencore's protracted 15-month tussle to buy miner Xstrata. Walsh's contract runs until 2015.
Tuesday's statement bars Glencore from bidding for six months under UK takeover rules, but that could be overcome.
Several sources familiar with the matter said Glencore, if it were to come back, would likely wait for iron ore prices to drop further and for the ratio between Rio's shares and its own - the likely currency for a deal - to improve.
Rio's Australian shares jumped as much as 4.7 per cent to a 9-day high of A$60.28 in a weaker broader market after the company issued the statement. Its London shares were up 2.1 per cent at 3,057 pence in late afternoon trade, easing off earlier highs after Glencore's statement.
Glencore was down 2.1 per cent at just over 332 pence.
"At this stage, nothing is going to change materially in the next six months, unless the commodity price landscape changes dramatically," analyst Ben Davis at Liberum in London.
"The deal makes a lot of sense from a Glencore standpoint. They have a lack of long-term assets and are heavily leveraged. A big paper transaction like Rio could help."
China's blessing
Iron ore would fill a gap in Glencore's range of commodities, where it already has strong positions in copper, nickel, zinc and coal. Merging with Rio would provide Glencore with instant scale in iron ore, boost its trading business, and give the indebted company access to Rio's balance sheet.
The two could save about $500 million just by combining their neighbouring coal operations in Australia, Citi estimated.
But analysts and bankers have also outlined major hurdles to a deal, saying Rio Tinto shareholders would want a hefty premium, China would likely force a merged group to sell some copper and coal assets, and Rio's conservative culture would clash with Glencore's aggressively entrepreneurial DNA.
"It ticks a lot of boxes for Ivan, but I'm not so sure that it does so for Rio shareholders," one of Rio Tinto's 30 largest investors said from London. "We'd prefer as much cash as we could get and you'd be looking at a pretty hefty premium to the current share price to get a deal."
Others agreed the premium or cash required to go straight to shareholders could be too much for Glencore's own investors.
"I don't think Glencore would go hostile and try and take out Rio. That would be a big bite," said Jason Beddow, managing director of Argo Investments, the sixth-largest holder of Rio's Australian shares.
Rio disclosed the approach after Bloomberg reported that Glencore had talked to Rio's top shareholder, Chinese state-owned Aluminum Corp of China (Chinalco).
The report, citing people familiar with the situation, said talks with Chinalco took place after Rio's rejection and that Glencore was testing the waters with other Rio shareholders - studying obstacles as it weighed its next steps.
Any bid for Rio would need China's blessing, as Chinalco owns 9.8 per cent of the company, a stake it bought in February 2008 as it sought to block a $127-billion takeover bid from BHP Billiton. Chinalco is sitting on a big loss on its stake, bought for £60 a share, or double Rio's current London-listed price.
A Chinalco spokesman in Beijing did not answer telephone calls on Tuesday, which was a public holiday in China.
Iron ore hit
Analysts at Bernstein calculate for every dollar fall in the price of iron ore, Rio's assets lose $1.5 billion in value.
Rio has focused on slashing costs while expanding its iron ore output to what it calls "epic proportions", not shying away from the fact that it is largely dependent on steel growth in China, which is slowing.
"The board believes that the continued successful execution of Rio Tinto's strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders," Rio Chairman Jan du Plessis said in a statement.
Unlike its bigger rivals, who have flagged they are going to stay away from chasing acquisitions for the foreseeable future following a string of soured deals, Glencore has been looking for bargains. Analysts have pointed to potential expansion in oil or agricultural commodities, as well as metals.
Following its $46-billion merger with Xstrata last year, it bought Chad-focused oil company Caracal Energy this year for about $1.3 billion and has been looking to buy BHP's troubled Nickel West business.
With companies like Rio, BHP, Anglo American and Cliffs Natural Resources looking to sell assets, there is plenty for Glencore to choose from without having to pay up for Rio, said Ric Ronge, a portfolio manager at Pengana Capital.
"Glencore, if it's got the appetite, can probably find a situation where it can get a lot more bang for its buck in terms of finding something that's more stressed and has a better fit with their existing asset spread," Ronge said.
"Obviously they'd like iron ore, but the question is at what price?"
Rio said on Tuesday that it was contacted about a potential deal in July, as the price of its most profitable product, iron ore, was heading towards five-year lows. Glencore confirmed later that it had made a telephone call to gauge interest in "some form of merger".
"Rio Tinto responded that it was not interested in pursuing these discussions,8" Glencore said in a statement.
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Glencore's billionaire chief executive Ivan Glasenberg, who sources say had made the approach personally, was turned down in August, and Rio said there had been no further contact.
"The Rio Tinto board, after consultation with its financial and legal advisors, concluded unanimously that a combination was not in the best interests of Rio Tinto's shareholders," Rio Tinto said in a statement to the Australian stock exchange.
Market speculation about a potential Glencore approach for Rio has been simmering for weeks, fuelled by the sharp drop in iron ore, the material which accounts for more than 90 per cent of Rio's profits. Industry bankers say Glencore has recently talked openly about wanting to take over Rio, coveting its low-cost, high-quality iron ore.
The rebuff may have ended the prospect of a deal in the short term, and Glencore said in its statement that it was no longer actively considering a bid. But both sides failed to dampen questions about future acquisitions for Glencore's Glasenberg, one of the industry's most ambitious dealmakers - including the potential for another run at Rio.
"This is the most obvious deal you could think of, especially if (Rio Chief Executive) Sam Walsh is on his way out. But the Xstrata experience shows it could take 3 years," one of the sources said, referring to Glencore's protracted 15-month tussle to buy miner Xstrata. Walsh's contract runs until 2015.
Tuesday's statement bars Glencore from bidding for six months under UK takeover rules, but that could be overcome.
Several sources familiar with the matter said Glencore, if it were to come back, would likely wait for iron ore prices to drop further and for the ratio between Rio's shares and its own - the likely currency for a deal - to improve.
Rio's Australian shares jumped as much as 4.7 per cent to a 9-day high of A$60.28 in a weaker broader market after the company issued the statement. Its London shares were up 2.1 per cent at 3,057 pence in late afternoon trade, easing off earlier highs after Glencore's statement.
Glencore was down 2.1 per cent at just over 332 pence.
"At this stage, nothing is going to change materially in the next six months, unless the commodity price landscape changes dramatically," analyst Ben Davis at Liberum in London.
"The deal makes a lot of sense from a Glencore standpoint. They have a lack of long-term assets and are heavily leveraged. A big paper transaction like Rio could help."
China's blessing
Iron ore would fill a gap in Glencore's range of commodities, where it already has strong positions in copper, nickel, zinc and coal. Merging with Rio would provide Glencore with instant scale in iron ore, boost its trading business, and give the indebted company access to Rio's balance sheet.
The two could save about $500 million just by combining their neighbouring coal operations in Australia, Citi estimated.
But analysts and bankers have also outlined major hurdles to a deal, saying Rio Tinto shareholders would want a hefty premium, China would likely force a merged group to sell some copper and coal assets, and Rio's conservative culture would clash with Glencore's aggressively entrepreneurial DNA.
"It ticks a lot of boxes for Ivan, but I'm not so sure that it does so for Rio shareholders," one of Rio Tinto's 30 largest investors said from London. "We'd prefer as much cash as we could get and you'd be looking at a pretty hefty premium to the current share price to get a deal."
Others agreed the premium or cash required to go straight to shareholders could be too much for Glencore's own investors.
"I don't think Glencore would go hostile and try and take out Rio. That would be a big bite," said Jason Beddow, managing director of Argo Investments, the sixth-largest holder of Rio's Australian shares.
Rio disclosed the approach after Bloomberg reported that Glencore had talked to Rio's top shareholder, Chinese state-owned Aluminum Corp of China (Chinalco).
The report, citing people familiar with the situation, said talks with Chinalco took place after Rio's rejection and that Glencore was testing the waters with other Rio shareholders - studying obstacles as it weighed its next steps.
Any bid for Rio would need China's blessing, as Chinalco owns 9.8 per cent of the company, a stake it bought in February 2008 as it sought to block a $127-billion takeover bid from BHP Billiton. Chinalco is sitting on a big loss on its stake, bought for £60 a share, or double Rio's current London-listed price.
A Chinalco spokesman in Beijing did not answer telephone calls on Tuesday, which was a public holiday in China.
Iron ore hit
Analysts at Bernstein calculate for every dollar fall in the price of iron ore, Rio's assets lose $1.5 billion in value.
Rio has focused on slashing costs while expanding its iron ore output to what it calls "epic proportions", not shying away from the fact that it is largely dependent on steel growth in China, which is slowing.
"The board believes that the continued successful execution of Rio Tinto's strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders," Rio Chairman Jan du Plessis said in a statement.
Unlike its bigger rivals, who have flagged they are going to stay away from chasing acquisitions for the foreseeable future following a string of soured deals, Glencore has been looking for bargains. Analysts have pointed to potential expansion in oil or agricultural commodities, as well as metals.
Following its $46-billion merger with Xstrata last year, it bought Chad-focused oil company Caracal Energy this year for about $1.3 billion and has been looking to buy BHP's troubled Nickel West business.
With companies like Rio, BHP, Anglo American and Cliffs Natural Resources looking to sell assets, there is plenty for Glencore to choose from without having to pay up for Rio, said Ric Ronge, a portfolio manager at Pengana Capital.
"Glencore, if it's got the appetite, can probably find a situation where it can get a lot more bang for its buck in terms of finding something that's more stressed and has a better fit with their existing asset spread," Ronge said.
"Obviously they'd like iron ore, but the question is at what price?"