Why Rio Tinto will never be taken over

Why Rio Tinto will never be taken over

The big headline this week was the news that Glencore had approached the Rio Tinto (ASX: RIO) board about a friendly deal which, if consummated, would result in the biggest mining company in the world. Does this story sound familiar? You may remember BHP Billiton (ASX: BHP) went about a similar approach before the GFC. In BHP’s case, we actually saw a formal bid proposed (and supported by the RIO board) before a combination of the GFC and regulatory obstacles got in the way. But there was little doubt back then that the move made good sense for BHP, and so too it would make good sense for Glencore today.

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So why then would we say that a deal will never happen? Well, there are some pretty big differences between the two moves. Like with BHP, Glencore could never make a move for RIO using cash (a market capitalisation of over $100bn would be a big bite for anyone) so any bid will have to be using its shares, and likely at a significant premium considering the logic of a move for RIO shareholders in the absence of a premium would be the assumption that the Glencore management team will do a better job. But that’s where any bid will get stuck, as Glencore does not have the dual-listing that RIO does (and BHP had up its sleeve) so we can’t see Australian RIO shareholders being too keen to take London-listed stock or a new Australian listing of Glencore. And that’s even before we come to the same regulatory issues that BHP was facing.

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Glencore CEO Ivan Glasenberg has gone about the move by criticising RIO for flooding the market with new iron ore supply and thus depressing prices – we assume in the hope of seeing support for the RIO board waver. Once again we see this as a miscalculation. While Mr Glasenberg may be right in that the oversupply of iron ore will most certainly keep prices low, if RIO were to hold back its expansion plans while BHP, Brazil’s Vale, Fortescue Metals (ASX: FMG), etc., continued to grow their volumes then RIO would be left behind with lower revenues and higher marginal costs while the market would still be oversupplied.

So unfortunately for RIO shareholders we don’t see the news of Glencore interest as anything more than wishful thinking, and with BHP out of the picture already that leaves RIO as pretty much untouchable.

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