Rio Tinto (RIO) shareholders and board can only smile as the auction of its NSW Hunter Valley coal mining assets continues to generate higher bids.
There should be quite a few grins at the shareholder meetings scheduled for tomorrow night in London – the meetings are likely to be postponed till later in the year after Glencore lobbed its second and higher (more than $US2.6 billion) offer late Friday night, Sydney time.
It followed Rio’s rejection of its first bid of $US2.55 billion, which topped the first offer from Yancoal Australia and its Chinese parent) offered $2.45 billion, with a $US1.95 billion upfront payment and then five more yearly payments of $US100 million each.
Glencore offer was worth $US100 million more offered up front, but Yancoal countered and offered to accelerate all deferred payments and make a single payment of $US2.45 billion at completion of the purchase the C&A assets plus coal price-linked royalty.
The Rio board accepted that revised, though slightly cheaper offer in a statement last week. Rio said the Yancoal bid offered better value and certainty for shareholders.
The on Friday Glencore went for the knock out blow – upping its offer to $US2.67 billion (over $A3.5 billion) and offering to pay all the amount up front.
To sweeten the deal, Glencore said it would pay Rio $US225 million if the deal was blocked by regulators in China, Korea, Taiwan or Australia, something which it did not see as likely. Yancoal has only offered $US22 million.
“Glencore believes that there is no legal basis to consider that such approvals will not be obtained,” the company said in a statement (http://otp.investis.com/clients/uk/glencore1/rns/regulatory-story.aspx?cid=275&newsid=885845).
As in its previous offer, Glencore wants an answer from Rio by close of business today, June 26, or its off.
“Glencore’s Offer will automatically lapse if it is not declared by Rio Tinto to be a superior proposal by 6pm (BST) on 26 June 2017 and thereafter if a binding SPA has not been executed by 4pm (AEST) on 5 July 2017,” Glencore said on Friday
“We believe the Glencore Offer satisfies the criteria for a "superior proposal": it delivers substantially greater value to Rio Tinto shareholders and low deal completion risk.
"Rio Tinto must provide Yancoal with the opportunity to present a counter offer. If any such counter offer is determined by the Rio Tinto board to be equally or no less favourable than the competing proposal, then Rio Tinto must accept the Yancoal counter offer.”
The fate of offers to Mitsubishi for its 30% plus stakes in the mines of Coal and Allied, the Rio subsidiary, remains unknown. Glencore had previously offered $US920 million and will now have to raise that to over $US1 billion to win over the Japanese group. Yancoal’s offer is $US710 million.
In a statement issued early Saturday Sydney time, the Rio board said it “will give the new proposal appropriate consideration and will provide a further update in advance of the general meeting of Rio Tinto plc to be held in London at 11am on Tuesday 27 June 2017."
“If Glencore’s revised proposal is deemed to be a superior proposal under the terms of the sale and purchase agreement with Yancoal and the Rio Tinto board decides the revised proposal is in the best interests of shareholders, then the Rio Tinto board intends to adjourn the general meeting of Rio Tinto plc.
"The matching rights process, pursuant to which Yancoal will have two business days to present a counter offer, would then be implemented. If the Rio Tinto board decides to reject Glencore’s revised proposal, then the general meeting of Rio Tinto plc is expected to proceed as currently scheduled.
“In the event that the Rio Tinto board requires additional time to give the Glencore proposal appropriate consideration then the Rio Tinto board may adjourn the general meetings of Rio Tinto plc and Rio Tinto Limited(the Australian company).
Glencore’s latest offer – especially the ‘break payment’ based on regulatory approvals is an attempt to address the concerns that its offer could face months of regulatory issues in China.
Although most of the coal exported by Coal & Allied is bought by utilities, steel mills and cement companies in Japan, where Glencore already has regulatory approval for its bid, Chinese authorities are likely to scrutinise the deal and take time to do so.
“Glencore believes that it will obtain all the regulatory approvals in a timely manner and that its offer compensates Rio Tinto for any potential delays beyond Yancoal’s expected completion date,” it said in its statement.
In addition to receiving the earnings of Coal & Allied up to September 1, Glencore said Rio would receive cash compensation beyond that date until its deal was signed off by regulators.
But the pressures on Rio remain and analysts say if it decides to recommend Glencore’s bid it could damage its relations with China.
China is Rio’s biggest customer and Chinalco, a state-controlled aluminium producer, is its biggest shareholder, with a 13% stake (and saved Rio after the miner nearly collapsed after the GFC under the weight of more than $US40 billion in debt taken on for the overpriced Alcan purchase). v Glencore has long wanted the Coal & Allied mines in the Upper hunter Valley because they offer enormous economies of scale with Glencore’s own mines nearby (one of which was owned by a Coal and Allied associate years ago.
If combined, the two mining groups will make Glencore the biggest coal exporter from Australia with more than 81 million tonnes of soft coking and thermal coal a year, worth close to $A6 billion.
Yancoal has the right to match Glencore’s offer and its Chinese backers will probably try a matching deal (despite reported struggles to find the money for the first $US2.45 billion bid).
