Glencore Said to Lay Groundwork for Potential Rio Merger in 2015

Oct. 6 (Bloomberg) — Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion, according to people familiar with the situation.

As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio Tinto’s largest shareholder, to gauge its interest in a potential deal, said two of the people, who asked not to be identified because the matter is private. The discussions with the company, which is known as Chinalco and controls about 9.8 percent of Rio, took place in recent weeks, one of them said.

Rio executives are well aware of Glencore Chief Executive Officer Ivan Glasenberg’s interest in a deal, which has been made clear in informal settings, the people said. However, no talks are underway between the two companies, no formal offer has been made, none is likely before the end of 2014, and Glencore could decide against an offer, they said.

Glencore views Chinalco as potentially supportive of a change in control after the Chinese company failed to secure a board seat at Rio and has seen little progress on a joint iron- ore project in Guinea, one of the people said. Glencore is also gauging the views of other Rio shareholders, and studying the tactical, financial, and regulatory obstacles to the deal as it considers its next steps, the people said.

Largest Mining Group

A merger would catapult the combined company past BHP Billiton Ltd. to become the largest mining group, combining Glencore’s vast commodity-trading operations with Rio’s portfolio of iron-ore projects that feed demand for construction materials in China.

Spokesmen for Glencore, Rio and Chinalco declined to comment.

For Glasenberg, 57, the time may be right to move toward a deal because of persistent weakness in the market for iron ore, which accounts for almost half of Rio’s revenue and is weighing on its share price. The cost of the steelmaking ingredient has plunged about 41 percent this year due to a glut from giant new mining projects and relatively sluggish economic performance in China, the world’s biggest single market.

Due in large part to the price of iron ore, Rio’s shares have declined 12 percent this year in London, giving the company a market value of about 56 billion pounds ($90 billion). That brings it within striking distance of Glencore’s 45-billion- pound market capitalization, which has risen almost 12 percent in 2014.

Opportunity

Additionally, with Rio CEO Sam Walsh likely to retire by the end of next year, Glencore sees an obvious opportunity to avoid a battle over who would run the combined company, two of the people added.

Any offer would consist primarily of shares in Baar, Switzerland-based Glencore with some cash, and the company isn’t interested in a hostile deal, said the people.

Chinalco paid 6,000 pence a share in 2008 for its Rio stake, roughly double the company’s share price today. It currently owns 9.8 percent of voting rights, according to Rio. The Chinese company is not eager to sell, and would demand a significant premium in order to sign off on a deal, one of the people said.

A merger proposal would face several additional obstacles. While Rio’s managers aren’t implacably opposed to a tie-up with Glencore, they believe the slump in iron-ore prices would put the company at a disadvantage in negotiations, two of the people said. For that reason, their first response to an offer will almost certainly be a rejection, the people said.

Series of Deals

They’re also eager to ensure Rio executives would remain in key roles in a merger that would probably be billed as a combination of equals, especially after Glasenberg largely ejected Xstrata Plc managers after Glencore agreed to buy that company in 2012, one of the people said.

Through a series of deals over the last decade, South African-born Glasenberg — an accountant by training — has transformed Glencore from a little-known commodity-trading house into a diversified global mining group. His largest deal so far, the $29 billion acquisition of Xstrata in 2012, turned Glencore into the world’s fourth-largest mining group at the time. With significant operations in copper, nickel, and coal, the only major commodity it doesn’t figure prominently in is iron ore, which Rio offers in huge quantities.

Rio’s record of recent strategic decisions has been mixed. Former CEO Tom Albanese resigned unexpectedly last year after the company was forced to drastically write down the value of a coal project it had acquired in Mozambique. Under Walsh, the company has embarked on a cost-cutting drive and increased payouts to investors.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore.

–With assistance from Anousha Sakoui in Los Angeles, Dinesh Nair in London, Brett Foley in Melbourne, Jacqueline Simmons in Paris and Jeffrey McCracken in New York.

To contact the reporters on this story: Matthew Campbell in London at [e-mail]; Zijing Wu in Hong Kong at [e-mail]; Jesse Riseborough in London at [e-mail] To contact the editors responsible for this story: Timothy Coulter at [e-mail]; Jeffrey McCracken at [e-mail] Aaron Kirchfeld, Will Kennedy