Rio Tinto’s shares trimmed their gains late on Tuesday after smaller rival Glencore said it was no longer actively considering any possible merger transaction, though it added it reserved the right to make an offer in future
The move to create a mining and trading giant worth around 130 billion euros came back in July, but we only just learned that Rio said no in August.
“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.
A merger would have created the world’s biggest miner, supplanting BHP Billiton.
Christian Stocker, strategist at UniCredit, said the merger talks highlighted that there was some need for companies in the sector to consolidate their businesses and adress issues such as falling commodity prices, excess capacities and high costs.
“Any such deal has the potential to stabilise the performance of the sector. But the scenario of a mega company controlling production, distribution and prices of commodities in such a big way is also not very healthy for the market and relatively smaller players.”
Deal or no deal
The share price rise in early trading on Tuesday reflected the feeling among investors that a deal was still possible despite the rebuff, and would benefit both companies.
Analysts at Citi estimated they could have saved close to 400 million euros just by combining their neighbouring coal operations in Australia.
Glencore, which last year bought rival Xstrata in the sector’s largest ever takeover, reportedly coverts Rio Tinto’s low-cost, high quality iron ore.
Iron ore would fill a gap in Glencore’s suite of commodities, where it already has strong positions in copper, nickel, zinc and coal.
However agreeing a merger price with shareholders would be a struggle. Analysts and bankers said Rio Tinto shareholders would want a massive premium.
In addition China – which holds 9.8 percent of the company through state owned Chinalco – would likely force a merged group to sell some copper and coal assets.
On top of that Rio’s conservative culture would clash with Glencore’s aggressively entrepreneurial style.
Shock and ore
This all comes as Rio Tinto’s most profitable product, iron ore, slid toward a five-year low.
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 Tinto Chairman Jac Nasser said in a statement.
Glencore has criticised the top iron ore producers for driving down prices by ramping up production.