Jan 9 (Reuters) – Rio Tinto is in early talks to buy Glencore, the companies said, in what could create the world’s largest mining company with a combined market value of nearly $207 billion.
Following is investor and analyst reaction to the news.
WILSON ASSET MANAGEMENT PORTFOLIO MANAGER JOHN AYOUB, WHOSE FIRM HAS SHARES IN RIO TINTO:
“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.
“Coal would have to be divested to garner the support of the Australian shareholder base. Rio has been a relatively simple story of iron ore, copper, aluminium and lithium (of more recent times). Adding a few others dilutes the story and you would need to see significant synergies to offset that dilution.”
ARGO INVESTMENTS SENIOR PORTFOLIO MANAGER ANDY FORSTER, WHOSE FIRM HAS SHARES IN RIO TINTO:
“It makes sense if terms are right for both. 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.
“I hope Rio stays disciplined but it makes sense to look at deals where value can be extracted by both parties.”
ALLAN GRAY ANALYST TIM HILLIER, WHOSE FIRM HAS SHARES IN RIO TINTO:
“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.
“Rio has a strong pipeline of internal high-growth projects. It’s not clear why they need to look externally for things to do.”
RBC ANALYST KAAN PEKER
“Consensus is they will get rid of coal. Reintroducing coal exposure definitely is unacceptable to a significant proportion of Rio shareholders, particularly in Europe.
“I think BHP has a cleaner growth profile in copper than a merged Rio/Glencore so I don’t think they need to do anything.”
JEFFERIES METALS AND MINING ANALYSTS:
“The structure of a Rio-Glencore merger would be complex. One possibility is 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 company’s 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. That scenario could have problematic tax implications and would be difficult to structure.
“Another possibility is that Glencore de-merges coal and then sells itself to Rio in an all-share deal at a sizable premium (we would not expect Glencore to get taken out in a nil-premium merger). This could dilute Chinalco’s stake in Rio and potentially enable Rio to subsequently do a large share buyback (similar to what BHP had proposed when it tried to acquire Rio in 2007-08). In this potential full merger scenario, there could be substantial synergies, including in Marketing.”
(Reporting by Scott Murdoch in Sydney and Melanie Burton in Melbourne; Editing by Jamie Freed)
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