- Rio Tinto confirms takeover talks with Glencore
- Potential culture clash issues between the two companies
- A successful bid would reduce the number of diversified miners left in FTSE 100 to just two names
- Rio Tinto has a patchy track record with M&A and transformational takeovers rarely add value
Dan Coatsworth, head of markets at AJ Bell, comments:
“The mining sector cannot give up on the mantra that bigger is better. Takeover talks between Rio Tinto and Glencore make sense from an economy of scale perspective, but the companies are worlds apart culturally.
“Rio Tinto has tried to forge a path where the journey is all about fine tuning operations to make everything run efficiently, while also distancing itself from M&A mistakes of the past. It’s seen as the wise old man of the sector, doing everything methodically.
“Glencore couldn’t be any different with guns-a-blazing reputation. Its past is controversial, to say the least, with issues of bribery and market manipulation.”
Similarities and differences
“There is an overlap between the businesses as they are both big in copper and iron ore, albeit Glencore does more on the marketing side than production for the latter.
“Rio Tinto waved goodbye to coal many years ago, whereas Glencore remains a top global coal producer. It’s unlikely that Rio Tinto would want to do a U-turn on coal, so it’s fortunate that Glencore has restructured its coal holdings into a separate entity that could be spun off easily.
“The potential deal is pitched as a merger, but Rio Tinto has the upper hand. It’s effectively Rio Tinto buying Glencore as it is more than twice its size by market value.
“The market had been expecting Rio Tinto to appoint a dealmaker as its next CEO, but surprised last year when it promoted iron ore division boss Simon Trott to the top job. It was thought he would focus on cost cutting but the temptation to gobble up Glencore has clearly been too powerful.
“Trott will want to make his mark as CEO and what better way than to buy a rival business. If it works out, he will look like a wise man in the sector. If it doesn’t, he’ll just join the long list of mining bosses who tripped up with M&A.”
Rio Tinto’s M&A mistakes
“Rio Tinto has a patchy track record with takeovers where mistakes cost then-CEO Tom Albanese his job in 2013. Rio suffered a $14 billion write-down on the purchase of Canadian aluminium group Alcan and Mozambique-focused Riversdale Mining. Alcan was acquired just as the global economy was going into a major downturn, while the coal assets turned out to be a dud because of logistical challenges and mistakes interpreting the geology.
“Most so-called ‘transformational deals’ destroy, not generate, value for the buyer. Cost synergies often fall short, there can be cultural clashes, and integration can be complicated and messy.”
Shrinking number of miners in FTSE 100
“If Rio Tinto is victorious in buying Glencore, it will reduce the number of diversified miners in the FTSE 100 to just two names – Rio Tinto and Anglo American.
“BHP switched its listing category four years ago, so it no longer qualifies for the index. Anglo American has pledged to retain its primary listing in London following its merger with Teck, yet it feels inevitable that a business now headquartered in Canada might reconsider down the line and have the main listing closer to home at some point.
“Rio Tinto recently fought off pressure from an activist investor to switch its main listing to Australia, and Glencore decided against moving its listing from London to the US. Should the two companies come together, it’s likely the business would canvass opinions from its new, enlarged shareholder base about listing preferences.”
