Rio Tinto rejected a merger approach from smaller rival Glencore to create a $160 billion mining and trading giant in August just as the price of its most profitable product, iron ore, slid toward a five-year low. The miner said on Tuesday Glencore had contacted it about a potential merger in July, adding that it turned Glencore down in August and there had been no further contact between the companies on a deal. A merger would have created the world's biggest miner, supplanting BHP Billiton.
“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,” Rio Tinto said in a statement to the Australian stock exchange. 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.
Rio revealed the approach after Bloomberg reported that Glencore had talked to Rio's top shareholder, Chinese state-owned Aluminum Corp of China (Chinalco), to gauge its interest in a deal. The report, citing people familiar with the situation, said talks with Chinalco took place in recent weeks, and Glencore was also testing the waters with other Rio shareholders, studying financial and regulatory 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. Chinalco is sitting on a big loss on its stake, bought in February 2008 for 60 pounds a share, double Rio's current London-listed price, as it sought to block a $127 billion takeover bid from BHP Billiton. A Chinalco spokesman in Beijing did not answer telephone calls on Tuesday, which is a public holiday in China.
Glencore, which last year bought rival Xstrata in the sector's largest ever takeover, has recently talked openly about wanting to merge with Rio Tinto, coveting its low-cost, high quality iron ore, bankers have said. Iron ore would fill a gap in
Glencore’s suite of commodities, where it already has strong positions in copper, nickel, zinc and coal. But analysts and bankers saw major hurdles to a deal, saying Rio Tinto shareholders would want a massive 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.
Rio Tinto shareholders said that given that most of the market sees Rio Tinto as currently at least 30 per cent undervalued, Glencore would have to go hostile with any offer that fit with its own return hurdles. "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.