Shares in mining giant Rio Tinto Limited (ASX: RIO) have jumped today as rumours have heated up over a potential merger with Swiss miner and commodities trader, Glencore PLC (LON: GLEN).
In an ASX announcement released this morning, Rio said it was contacted by Glencore in July, regarding potential merger discussions. However the Rio board, after seeking financial and legal advice, “concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders.”
Rio said it communicated this with Glencore in August and hosed-down further merger discussions by saying: “The Rio Tinto board confirms that no discussions are taking place with Glencore.”
So why are Rio shares up nearly 4% in early trade?
Shares could be higher for a number of reasons. However, obviously it confirms Glencore is interested in Rio.
What was just speculation yesterday could now be a possibility.
Although Glencore’s market value is around $83 billion and smaller than Rio’s $102 billion, it has a number of strings it can pull to put the odds of a takeover in its favour. And it’s doing just that.
According to a report from Bloomberg, it has already held discussions with Rio’s biggest shareholder, Chinalco, and is receiving advice on the deal from UK banking giant, Standard Chartered.
However, Glencore’s biggest bargaining chip could be playing out as we speak.
Thanks to a falling iron ore price, down 41% this year, Rio’s earnings are expected to be dealt a substantial blow, as the iron ore division goes “ex-growth”, according to analysts at Bernstein.
With 90% of profits derived from the steelmaking ingredient and a number of struggling business units, such as Energy and Aluminium, Rio’s decision makers may find themselves compelled by the deal, in time.
Indeed, a merger between Glencore and Rio, would create a $180 billion company with world-class operations in iron ore, copper, nickel and coal. In addition Glencore’s CEO, Ivan Glasenberg, has experience with this type of undertaking, having overseen the acquisitions of both Xstrata in 2012 and more recently, Caracal Energy Inc.
Buy, Hold or Sell?
I doubt today’s announcement will be the end of the Rio-Glencore merger speculation and has only served to heighten it if anything. At this stage, there are many unknowns (including what regulators would have to say about the deal) and Foolish investors are probably best off leaving Rio on their watchlist, until we know more.
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Motley Fool contributor Owen Raszkiewicz is Long December 2017 $48 warrants in Rio Tinto.