Multinational mining groups Rio Tinto and Glencore on Tuesday confirmed that they had held discussions regarding a possible tie-up, but said that the board of Rio Tinto had rejected a merger with its smaller rival.
Both companies confirmed in separate announcements that they were no longer in discussions.
Under the UK Code on Takeovers and Mergers, Glencore was now prohibited from making a renewed bid for Rio Tinto in the next six months, the Ivan Glasenberg-headed company reported on Tuesday.
The two companies were responding to a Bloomberg report that Glencore had made a move for Rio Tinto by approaching its main shareholder, Aluminium Corp of China (Chinalco). The deal would have created the world’s biggest mining and commodities group, reportedly worth $160-billion.
The possibility of a merger was discussed in an “informal enquiry by telephone” in July to gauge if there would be interest in investigating a merger between the two companies, Glencore explained in a statement.
However, after consultation with its legal advisers, the Rio Tinto board had concluded “unanimously” that a combination was not in the best interests of the company’s shareholders.
“The board’s rejection was communicated to Glencore in early August and there has been no further contact between the companies on this matter,” Rio Tinto stated.
“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’s shareholders stand to benefit from the very considerable value that this will generate,” said Rio Tinto chairperson Jan du Plessis.
Writing in a note following the merger news, analysts at UK-based Liberum said they believed the only way that Rio Tinto’s board would recommend a deal at a level of dilution that also made sense to Glencore would be if the iron-ore price was below $70/t and the relative prospects for Glencore’s commodity suit of coal, nickel, copper and zinc improved.
“Next year provides potentially the best opportunity for such a move, but today’s news should put a relative floor under Rio’s shares, preventing an opportunistic bid.”
The analysts said they believed that Glencore would only enact a bid if earnings per share dilution (post synergies) was less than 5%. “If shareholders are comfortable with more, they could just buy Rio shares. We also feel that Rio shareholders will need a bid premium of at least 25% to get a deal across the line, given the average sell-side target price for Rio.”
Liberum further noted that the Australian Foreign Investment Review Board (FIRB) could be a major hurdle to a potential tie-up between the companies, as the FIRB only approved deals deemed in Australia’s national interest and also questioned whether Chinalco would really be a friend to Glencore.