Freeport Offers Rio Recipe to Repel Glencore Advances: Real M&A

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Oct. 10 (Bloomberg) — Rio Tinto Group may decide that its best defense against another takeover approach from Glencore Plc is buying the largest mining company in the U.S.

A bid for Freeport-McMoRan Inc. will probably look tempting to London-based Rio as a way to stymie Glencore, said Paul Gait, an analyst at Sanford C. Bernstein Ltd. Freeport, a $32 billion copper producer that expanded into energy last year, is the cheapest it’s been in more than 15 months relative to earnings before interest, taxes, depreciation and amortization.

“I would be amazed if they aren’t running the ruler over it,” Gait said in a phone interview from London. “It would be a classic kind of defensive move by the board.”

Speculation about mining deals has intensified this week after Rio and Glencore, two of the industry’s biggest companies, confirmed Glencore’s informal approach about a possible merger. While Rio, valued at $92 billion, said it’s better off going it alone, a deal for Freeport could help it ward off any further advances from Glencore. It would also provide a means for Rio to lessen its dependence on iron ore at a time when the metal is slumping.

“Freeport fits all the criteria of an attractive takeout candidate and would make sense for a lot of the larger-cap global miners, anyone looking to increase their copper exposure and getting some very high-margin energy assets at the same time,” Garrett Nelson, analyst at BB&T Capital Markets in Richmond, Virginia, said in an interview. “The stock’s undervalued and they really have some world-class assets in both mining and energy.”

Ticking Clock

Eric Kinneberg, a spokesman for Phoenix-based Freeport, said the company doesn’t comment on speculation. A representative for Rio declined to comment.

Glencore, the $69 billion commodities conglomerate run by billionaire Ivan Glasenberg, said this week it’s no longer actively studying an offer for Rio. The Baar, Switzerland-based company is now barred, in most cases, from making a renewed bid for six months under U.K. takeover rules.

While Glencore could turn to alternative targets in the industry, a merger with Rio would create the world’s largest mining company, with a market value of about $160 billion. Rio’s desire to stay independent could lead to its own deal pursuits.

Big Departure

Bidding for Freeport would be a major departure for Rio’s Sam Walsh. Since taking over as chief executive officer last year, he’s shunned acquisitions and instead focused on cutting billions of dollars of operating costs and investments in future projects.

“We lost our way in relation to our acquisition ability,” Walsh said in December, reflecting on Rio purchases in previous years. The company paid about $37 billion for aluminum maker Alcan Inc. in 2007 and subsequently wrote down most of the deal’s value.

Even so, a takeover-as-defense strategy wouldn’t be without precedent in this year’s manic deal market. Brewer SABMiller Plc approached Heineken NV earlier this year in an attempt to shield itself from a possible acquisition by Anheuser-Busch InBev NV. In the drug industry, Allergan Inc. held talks to buy Salix Pharmaceuticals Ltd. or be sold to Actavis Inc. as it tries to fight off a hostile bid from Valeant Pharmaceuticals International Inc.

Decent Business

Freeport is the world’s largest publicly traded copper producer and the metal accounts for the majority of its revenue. The company, with mines in the Americas, Indonesia and the Democratic Republic of Congo, diversified into oil and gas last year after buying two energy companies for about $9 billion.

While copper prices have declined this year, Freeport’s mines are still profitable. Global demand exceeded production in June, according to the most recent data from the International Copper Study Group.

Freeport has “a very decent copper business and I think copper is deeply undervalued as a commodity,” Bernstein’s Gait said.

The company’s shares fell 17 percent this year, a bigger drop than the 3.9 percent decline in the Bloomberg World Mining Index, as a dispute with the Indonesian government curbed output at its biggest mine.

“It’s been a real headwind,” said Jorge Beristain, a Greenwich, Connecticut-based analyst at Deutsche Bank AG.

Freeport’s enterprise value is equivalent to 5.8 times its Ebitda for the past 12 months, the same as Rio’s, according to data compiled by Bloomberg. They’re both cheaper than the median multiple of 9.7 among metals and mining companies valued at $5 billion or more, the data show.

Backfire Risk

A Rio-Freeport merger may face antitrust scrutiny. The two companies accounted for about 11 percent of global copper supply last year, data compiled by Bloomberg show. Glencore’s acquisition of Xstrata Ltd. last year was only allowed by Chinese regulators on the basis that it sell a $7 billion copper mine in Peru.

A bid for Freeport may well end up backfiring on Rio, said Bernstein’s Gait, and boost Glencore’s chances in the event it comes back with another offer. Gait recommends buying Rio shares.

“All it will do is put Rio Tinto firmly in play,” he said. “What would you prefer? To pay a premium or to take one?”

–With assistance from Brooke Sutherland in New York.

To contact the reporters on this story: Liezel Hill in Toronto at [e-mail]; Jesse Riseborough in London at [e-mail]; Sonja Elmquist in New York at [e-mail] To contact the editors responsible for this story: Beth Williams at [e-mail]; Simon Casey at [e-mail] Simon Casey