Glencore has now abandoned a bid for Rio Tinto (RIO) in the wake of the news yesterday that an approach in July was strongly rebuffed by the Rio board.
That means Glencore is now barred, in most circumstances, from making a renewed bid for six months under the UK takeover code.
It doesn’t matter what the bid rules are in other countries, because Rio is a London domiciled company, the UK takeover rules govern any deal and they say a new bid can’t be launched until six months after the first offer was called off.
Glencore’s decision is a sign that it has seen the impossibility of launching a hostile bid for Rio with no cash component, or one that would be too small to be convincing.
Glencore is highly indebted and needs to cut its costs and debts as the global economy slows and commodity prices continue to weaken (oil fell again overnight to levels last seen in 2012).
So Glencore’s decision to throw in the towel for now wasn’t unexpected by hard headed analysts (and not those touting for business).
"Glencore confirms that it is no longer actively considering any possible merger transaction with, or offer for the shares of, Rio Tinto," this morning’s statement said.
"As a consequence of this announcement, the Panel Executive has determined that Glencore is for a period of 6 months from the date of this announcement subject to Rule 2.8 of the City Code on Takeovers and Mergers in relation to Rio Tinto.
"Glencore however reserves its rights to make an offer in the future with the consent of the Takeover Panel, either with the recommendation of the Board of Rio Tinto, in the event of a third party offer for Rio Tinto, or in the event of a material change in circumstances,” Glencore’s statement added.
RIO YTD – Glencore rules out Rio bid
Barring a repeat of the GFC or the collapse in global iron ore prices, something else dramatic, there will be no bid from Glencore for Rio for quite a while.
The global slide in commodity prices is also making a mess of its finances, just as the slide in iron ore ore prices is hurting Rio’s profit and loss account.
So all the ‘inside’ speculation from business writers and investment analysts this morning is all hot air and for nothing – though you have to be careful of banking and broking analysts, they could be touting for business in their commentaries.
So Rio Tinto’s ‘go away to Glencore back in early August has worked, and Glencore’s cunning attempt to lift the pressure on Rio via leaking news of an approach to Rio’s biggest shareholder, Chinalco, to Bloomberg last week, has come a cropper.
Now if Glencore really wants Rio, it has to come back with a real price and structured offer, not hot air. But watch for more leaks from Glencore to brokers and credulous media in the meantime.
So the silly punters and hedge funds desperate for a takeover situation who ignored Rio’s strong rejection and piled into Rio shares yesterday, pushing them 4.3% higher to $A60.07, will quit the stock today and the shares will fall sharply.
Not helping will be the big falls on Wall Street and Europe overnight of 1 to 2% (and 1.2% to 1.3% on Wall Street). Our market will be down more than 30 points at the start, according to the futures market.
So will the silly day traders and hedge funds still think a deal is possible, as did some media and investment analysts yesterday?
What the media and broking enthusiasts ignored is that for Glencore to win, it would have to launch a hostile bid. Hostile bids do not work with all paper offers – a solid cash component (at a bare minium) would have to be offered. Glencore has recognised that.
That is something Glencore can’t afford. It wants access to Rio’s superior balance sheet and cash flows to improve its financial standing, and it wants to do it with paper, rather than cash, which is always the deal decider.
That is obviously beyond Glencore which remains heavily indebted following the $US33 billion Xstrata takeover in 2012. Glencore has failed to make a big dent in its debt.
Yesterday’s revelation by Rio Tinto that it had discussed they rejected an approach from Glencore was however it a bit late.
The approach and rejection should have really been made public in July – August, when, according to the Rio statement, it was made.
It would seem the market has been uninformed for two months.
Reports from Bloomberg that Glencore had approached Rio’s biggest shareholder, Chinalco, flushed out Rio’s statement yesterday.
Rio said its board, “concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders”.
“The board’s rejection was communicated to Glencore in early August and there has been no further contact between the companies on this matter," Rio said in a statement.
A takeover would create the world’s largest mining company but is likely to face opposition from regulators, as well as the Rio board.
"The Rio Tinto board confirms that no discussions are taking place with Glencore.” In July 2014, Glencore contacted Rio Tinto regarding a potential merger of Rio Tinto and Glencore.
“The Rio Tinto board, after consultation with its financial and legal advisers, concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders.
“The board’s rejection was communicated to Glencore in early August and there has been no further contact between the companies on this matter.
“Rio Tinto remains focused on the successful execution of its strategy, which the board of Rio Tinto is confident will continue to deliver significant and sustainable value for shareholders.
“Rio Tinto chairman Jan du Plessis said “Under the leadership of Sam Walsh and Chris Lynch, Rio Tinto has made significant progress in refocusing and strengthening its business.
“The board believes that the continued successful execution of Rio Tinto’s strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders.
“Rio Tinto’s shareholders stand to benefit from the very considerable value that this will generate.”
Rio’s shareholders though have had to put up with a long bout of weakness as iron ore prices (responsible for 90% of the company’s earnings) have dropped more than 40% this year.
Rio’s shares peaked at $A71.30 last year and a low point of $A57.06.
Glencore shares debuted at 524p in the 2011 float but quickly slid amid falling commodity prices and have gone nowhere since completion of the merger with Xstrata in May 2013.
Glencore shares closed at 339p in London on Monday and were up nearly 4% in overnight trading. Their 52 week low was 295p in March of this year.
The shares peaked at 379p in August when talk first started about its interest in Rio. The shares have never traded above the IPO price.
From what Rio said yesterday that’s when Glencore first approached the Rio board. Glencore shares have slipped around 12% since that peak.
