Giant Glencore’s US$160 billion play for Rio Tinto, which would create the world’s biggest mining company, is just the kind of breathtakingly aggressive play we’ve come to expect from the South Africans at the helm.

Glencore, headquartered in Zug, Switzerland, and listed in London, is run by Ivan Glasenberg, born in Johannesburg and now ranked by BRW as Australia’s fifth-richest man, with a fortune of $6.6 billion.

Glasenberg is foremost among a generation of South African mining executives who emigrated with a huge amount of wealth towards the end of the apartheid era.

Glasenberg’s peers include Mick Davis and Brian Gilbertson, who together transformed South African miner Gencor into the London-listed international mining house Billiton after a string of acquisitions, then pulled off one of the all-time reverse takeovers, a $56 billion friendly merger with Australia’s BHP in 2001. The deal was struck by winning over then BHP chairman Don Argus, who wrote to shareholders:

“The merger will take BHP into new product areas such as aluminum and alumina, ferroalloys, nickel and titanium and greatly expand our presence in steaming coal. We are particularly excited about the opportunities in aluminium and alumina where Billiton, with its low cost production and good expansion opportunities, is in an outstanding position to meet continuing growth in demand for those products.”

Though Argus denies it, most pundits consider that some 13 years later those assets proved of dubious value and the merger is effectively being unwound. BHP Billiton is about to spin off unwanted, non-core assets including almost all the South African mines acquired in 2001.

The fate of the BHP Billiton merger should give pause to those investors excited about the possible combination of Glencore and Rio Tinto.

In this statement to the ASX this morning, prompted by this Bloomberg story, Rio confirmed for the first time that it had had an approach from Glencore in July, but was at pains to pour cold water on talk of a merger, saying the board had:

“… 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’s rejection of a merger means a Glencore bid would need to be hostile, a much riskier proposition meaning no access to internal financials and a larger takeover premium to win over shareholders. On the ASX, Rio shares leapt 4% this morning, following bigger jumps overseas last night, and Glencore’s shares closed up 6% in London trade.

A bid for Rio would fill a gap in Glencore’s portfolio, giving it control of the Pilbara iron ore mines, which at last count generated more than 90% of Rio’s profit, but history suggests mega-mergers rarely add long-term value for shareholders. Both Glencore and Rio know this all too well. Rio’s disastrous, debt-fuelled US$38 billion Alcan acquisition just prior to the GFC almost destroyed the company, and its $4 billion acquisition in 2010 of Mozambican coal explorer Riversdale proved the end of former chief executive Tom Albanese. Glencore is another case in point. Glencore shares debuted at 524p in the 2011 float but slumped almost immediately amid falling commodity prices and have gone nowhere since completion of the US$82 billion merger with Xtsrata in May 2013. The shares closed yesterday at 339p.

The Glencore-Xstrata merger had limited impact in Australia. Glencore, principally a commodities trader, had few directly held assets in this country. Miner Xstrata, which bought Mt Isa Mines in 2003 and is Australia’s biggest thermal coal producer, simply changed hands. There were no competition objections.

A Glencore merger with Rio Tinto, itself a massive coal exporter from the Hunter Valley and Queensland’s Bowen Basin, would be far more significant and there could well be competition objections raised, both from competition regulators and coal buyers in Asia.

Degree of difficulty: very hard indeed.

Peter Fray

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