Glencore eyes up £94billion Rio Tinto merger to create world's largest miner, despite previous rejection

By PETER CAMPBELL FOR THE DAILY MAIL

Updated: 06:45 EDT, 7 October 2014

Glencore is preparing the groundwork for a £94billion mega-merger with Rio Tinto to create the world’s largest miner, supplanting BHP Billiton, it was reported yesterday.

It comes after London-listed Rio revealed it was originally contacted by commodities giant Glencore in July about a merger, but the board unanimously decided that a deal was not in the best interests of its shareholders.

Rio told Glencore, which also has a London listing, of its decision in August and there has been no further contact between the firms.

Digging for victory: Glencore is preparing the groundwork for a £94billion mega-merger with Rio Tinto to create the world's largest miner, it was reported yesterday

However, news of a possible hostile bid over the next 12 months sent mining stocks surging, wtih Rio Tinto stocks up 4.6 per cent, or 139p to 3,136p, during late morning trading. Glencore shares were 5.4p lower at 333.9p.

A spectacular fall in iron ore prices globally - which account for half of Rio’s business - has put the mining giant within reach of the ever-ambitious Glencore boss Ivan Glasenberg.

The South African businessman has informally voiced his ambitions in the past for another blockbuster takeover.

Last night financial news agency Bloomberg reported that Glencore has begun tapping up Rio shareholders to test the waters for a merger next year.

The prospect of the deal comes only 18 months after Glencore’s £41billion tie-up with Xstrata created the biggest commodities trader in the world.

Reports of the merger only appeared after the London Stock Exchange had ceased trading for the day.

But American-listed shares in Rio, called American Depositary Receipts, climbed by a fifth almost instantly on the prospect of the takeover.

No formal talks are under way, but Glencore has approached Rio’s largest investor to float the idea of the deal past them.

Reports said representatives of the miner had contacted the Aluminium Corporation of China, known as Chinalco, to test the waters.

Chinalco is state-backed and owns 9.8 per cent of Rio.

The talks, intended to gauge the group’s interests in a deal, took place in ‘recent weeks’. Chinalco may be open to talks, given that it recently failed to get a seat on Rio’s board.

It is understood that Glencore is now tapping up other major shareholders - such as Qatar with 8.8 per cent and Blackrock, which holds 5.2 per cent - before making a formal approach.

Executives at Rio are also aware of Glasenberg’s ambitions, it was said.

The Glencore chief, who spearheaded its Xstrata deal, has made his intentions apparent during informal meetings with Rio.

But no formal approach has been made by Glencore, and it is understood that it is unlikely any talks will begin before Christmas.

Rio Tinto chairman Jan du Plessis said in a statement: 'Rio Tinto has made significant progress in refocusing and strengthening its business.

'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.'

As the fourth largest miner in the world, Glencore currently has major operations in copper, nickel and coal - but none in iron ore.

The timing of a deal may also be right for Glencore, analysts said.

The iron ore price has fallen 41 per cent so far this year - weighing on Rio’s share price because it accounts for around half of its revenues.

Rio’s shares are down 12 per cent so far this year, valuing it at £56billion and bringing it within range of Glencore, which has a market value of £45billion.

Often merger deals are dogged by discussions of which chief executive will lead the resulting firm.

But Sam Walsh, Rio’s chief, is widely expected to retire at the end of next year, removing that potential roadblock from the path of any deal.

But any agreement faces a number of hurdles.

Investors in Rio, many of whom bought into the company at a higher price, would demand a substantial premium - especially given that Glencore is expected to make the majority of any offer in shares rather than cash.

Chinalco bought in to Rio at around 6,000p in 2008 - compared to yesterday’s closing price of 2,997p.

It is also likely that Rio bosses would hold out as long as possible in order to wait for iron ore prices to pick up - making the company more valuable and strengthening their hand in any negotiations.

Jason Beddow, managing director of Argo Investments, the sixth-largest holder of Rio's Australian shares, questioned Glencore's appetite for a hostile takeover, however: 'I don't think Glencore would go hostile and try and take out Rio. That would be a big bite.'

Glencore also ejected many of Xstrata’s managers following its tie-up, despite the move being billed as a merger.

It is likely Rio executives would therefore be tentative when coming to the table, it was reported.

Glencore has refused to comment.