We don?t believe Glencore (GLEN) will succeed in buying fellow FTSE 100 miner Rio Tinto (RIO) after the revelation (7 Oct) of a rejected merger approach in July. We reckon Glencore could find an easier way to get into the iron ore mining market such as buying Fortescue Metals (FMG:ASX). Sell Rio into bid-related price strength at £31.43.
The bears note Glencore is the smaller business at £45 billion versus £74 billion for Rio. We doubt Glencore would want to pay a 30% bid premium expected by Rio?s shareholders. The latter wouldn?t want to own riskier assets in the Democratic Republic of Congo and Colombia owned by Glencore. Indeed, Rio shareholders may see the overall deal as diluting high-quality assets with second-tier ones. Some of the big mining funds have an upper cap on single equity ownership versus an index, so they may have to be underweight a combined Glencore/Rio business which would be negative for the shares.
The bulls believe now is a good time for Rio?s 12.9% Chinese shareholder Chinalco to sell out given the Chinese government no longer has to worry about securing supplies of iron ore for steel mills given surplus global supply of the commodity. A deal would give Glencore scale in iron ore and create further value in its marketing business by accessing Rio?s logistics and blending Rio?s superior product to sell into China.
