The prospect of Glencore Plc (GLEN) buying Rio Tinto Group is sending reverberations through the mining industry that could prompt more deal talks.
Combining Glencore and Rio, which both confirmed they held informal discussions in July, would create a $162 billion behemoth. That such a merger would even be attempted speaks to the pressure the industry is under to cut costs and increase shareholder value amid declining prices for commodities.
A slump in iron ore gave Glencore a chance to go after a cheaper Rio and make it part of a diversified portfolio. With the deal now likely on hold for six months, Glencore could turn to other targets such as Fortescue Metals Group Ltd. (FMG) Or Rio could pursue a defensive deal with a company such as Anglo American Plc (AAL), according to Sanford C. Bernstein & Co.
“This is a hell of a thing they’re proposing,” Paul Gait, an analyst at Bernstein, said in a phone interview. In the past, “we have had that kind of one action precipitate a whole cascade of events that puts a number of other guys in play.”
Glencore approached Rio in July about a merger, and Rio rejected the idea a month later. Rio Chairman Jan du Plessis says the $92 billion company is better off with its current strategy of cutting costs and returning cash to investors.
Glencore said yesterday it’s no longer actively studying an offer for Rio, and under U.K. takeover rules it will now be barred from a renewed attempt for six months unless it obtains Rio’s board recommendation, a third party makes an offer for Rio or there are other material changes.
A representative for Baar, Switzerland-based Glencore declined to comment beyond the company’s statement yesterday. Spokesmen for Rio and Anglo, both based in London, also declined to comment. A representative for Fortescue didn’t immediately respond to requests for comment.
Other Options
Rio isn’t Glencore’s only option. Fortescue, a $9.4 billion Australian iron ore producer, may provide another way for the world’s third-biggest miner to expand in the metal, according to Marc Elliott, an analyst at Investec in London.
“Glencore likes deal flow and probably has got some other irons in the fire,” Elliott said in a phone interview. Fortescue is “certainly of the scale that would give interest to Glencore.”
Other analysts have speculated Anglo could be more digestible for Glencore than Rio. The $31 billion company controls copper, coal, iron ore, nickel, diamond and platinum mines. Chief Executive Officer Mark Cutifani is open to takeover offers, the Wall Street Journal reported last month, citing an interview.
Not Ideal
Deals for those two companies have hurdles, though. Fortescue’s iron-ore business isn’t of the same caliber as Rio’s and Glencore probably wouldn’t want Anglo’s platinum and diamond businesses, said Jeff Largey, a London-based analyst at Macquarie Group Ltd. Glencore CEO Ivan Glasenberg last month scoffed at the idea he has his sights set on Anglo.
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