According to preliminary reports today from Bloomberg, Glencore (GLEN:LN) which is the fourth largest mining company by market capitalization is entertaining the idea of merging with iron-ore juggernaut Rio Tinto which would create the world’s largest mining company in a +$160 billion deal.
According to the report, Ivan Glasenberg (Glencore’s CEO) has begun talks with Aluminum Corp. of China (Chinalco) to gauge Rio’s largest shareholder’s interest in a merger of this magnitude. Chinalco owns 9.8% of Rio Tinto shares and is a Chinese state-owned company. Given that Rio denied Chinalco’s request for Board representation, the state-owned entity may be even more motivated for a change of control at Rio.
A merger of this size would come with nearly endless complications including anti-trust laws. When Glencore acquired Xstrata in 2012, the Chinese insisted that Glencore agree to sell certain assets in order for the Chinese regulators to approve the transaction.
This merger would put the combined entity up against BHP Billiton as the largest mining company on the planet.
Glencore has the largest and most vast commodity-trading operation and Rio Tinto has a portfolio of iron-ore and other commodity assets that span the globe. Glencore’s business covers the entire commodity spectrum but one area in which it lacks significant operating exposure is iron ore.
As a result of this year’s weak iron ore prices, shares of Rio Tinto have dropped 12% versus Glencore’s near 12% gain over the same period. This makes merger talks with Rio that much harder given that they would be coming from a place of weakness and might be resistant to a deal from the beginning. According to the report, Glasenberg isn’t interested in a hostile bid.
With Rio sitting at a market capitalization of CAD $100 billion it is within merger territory of the CAD$80.5 billion Glencore.
Under Glasenberg’s leadership, Glencore has completed a number of high-profile acquisitions which culminated in the 2012 takeover of Xstrata for CAD $32 billion. After the deal closed, Glencore proceeded to axe almost all of the former Xstrata management (perhaps something else working against Glencore in negotiations with Rio Tinto). Glasenberg has proven to be one of the most adept acquirers in the space, but a deal of this size is unheard of in the mining business.
Nothing is expected to materialize before year-end, but it would bode well for an industry on its knees after years of commodity price declines. Given that this merger would garner significant international media attention, it could help jump-start the natural resource sector by highlighting the deep value opportunities in select mining companies.
Read: Glencore Said to Lay Groundwork for Potential Rio Merger (Bloomberg)
*This post will be updated as developments unfold