From BofAML via FTAlphaville:
GLEN/RIO? 6 reasons why a deal is NOT in the cards…
Bloomberg has published an article quoting “people familiar with the situation” who say Glencore is preparing a bid for Rio Tinto. Other brokers are pushing the idea as well, and the US ADR of RIO spiked up 18.5% on the headline and is currently trading up 8%.
Here are 6 reasons why a deal is not in the cards:
1. Chinalco is embroiled in China’s corruption crackdown. Chalco Vice Chairman Sun Zhaoxue resigned in September…it is very unlikely that this high profile a deal could get done at the company right now. http://www.reuters.com/article/2014/09/16/china-corruption-chinalco-idUSL3N0RH1YP20140916
2. Nil premium hostile mergers don’t work. The mining sector learned this lesson when Xstrata went after Anglo. Investors will demand a premium and Glencore will not be interested in offering one.
3. Big mining funds will have a chronic underweight if these companies merge. Maybe they will eventually find a way to get around it, but mining funds will constantly be underweight GLEN-RIO given the weight in the index, and would probably prefer that they stay separate.
4. Rio Tinto shareholders do not want to own assets in the DRC and Colombia. They are happy with their OECD exposure and can get diversification by owning other miners.
5. Glencore has been clear that their M&A focus is on small bolt-on deals in upstream oil and agri. This would be a major shift in their strategy, and I think it is unlikely that the company is really prepared to launch a bid for RIO any time soon.
6. Iron ore is a great commodity for traders when the market is tight because there are quality and geographic arbs. When the price is low and the market is over-supplied with high quality ore, it is debateable how much value a trader can add.
The idea of a Glencore – Rio tie-up has actually been in the press since December, and there is a logic to it from the Glencore side—namely that the Glencore management would get access to centuries of mine-life to feed into their trading business. Also owning Alcan would be a tremendous boon for Glencore’s aluminium business. I’m sure there would be synergies as well.
That said, Rio has less to gain from a deal (in the absence of a premium), the article is low quality, and I put the likelihood of a transaction in the next 12 months at next to zero. The fact that the US ADR spiked so much on the news just tells me that there are a lot of US hedge funds that are short iron ore names in size.
