Glencore's Unstoppable Position
Issue 97, September 2014
“Tactics flow from a superior position,” said troubled chess genius Bobby Fischer. So it was that Ivan Glasenberg’s Glencore, valued at $76bn, was able to make a plausible tilt at Rio Tinto this week, valued at $99bn.
According to a research note published by analysts at Sanford Bernstein and a feature in the Financial Times, weak iron ore prices could make Rio Tinto fall victim to a takeover by Glencore, if prices do not recover by the year end.
Such a merger would create “the biggest and most diversified mining company on the planet,” said Bernstein’s Paul Gait, marrying “the world’s most important set of mining assets to the most sophisticated commodities trading business.”
The seemingly co-ordinated stories look unlikely to have been published without Glencore’s oversight. Tellingly, Rio Tinto’s boss Sam Walsh felt unable to rubbish the rumours, calling it “a question for Ivan”, not him.
As in chess, good moves need not be aimed at a single target, or Rio Tinto’s queen. Talk of a merger with Rio has the knock-on benefits of stripping takeover expectations out of Anglo American, whilst sounding out Rio’s investors and bracing those of Glencore for fresh equity deals.
Several of Glencore’s statements can only be taken as decoys. Glasenberg has shunned “growth for growth’s sake” whilst taking an $8bn write-down on its $65bn merger with Xstrata last year. He has also derided greenfield spending and over-investment in iron ore, whilst committing $900m to a virgin iron ore development in West Africa this year.
Off-the-cuff comments about operational mergers with Vale in Canadian nickel and Rio Tinto in Australian coal, both downplayed by the opposing parties, have prompted analysts to chalk-up cost-savings, putting pressure on peers to join agreements that would add tonnage to Glencore’s trading clout.
Fronting an agenda of shareholder returns has meanwhile egged Rio and BHP Billiton into asset sales at a cyclical low, nudging BHP out of nickel and South African coal, two areas where Glencore is expanding. Ironically, stronger balance sheets make both groups more vulnerable to a deal with Glencore, which could release capital on any merger by lifting their gearing to its own levels.
To count this week as a victory by Glasenberg over Walsh however misses the point. Walsh may be willing prey. Glasenberg owns c.8 per cent of Glencore’s stock, a figure that rises with the company’s $1bn share buy-back announced last month. Walsh and Mark Cutifani, Anglo’s chief executive who last week said he was “open” to takeover offers, hold less than 0.1 per cent of their groups respectively.
The short-term uplift of an equity deal, triggering massive bonus payouts, may be all Glencore’s peers need.
Glasenberg's debt strategy
set to push more assets onto Glencore's balance sheet
Simandou emerging as valuable currency in Glencore's bid to swallow Rio Tinto
Former Glencore boss Michael O'Keeffe denies seeking access to Arcelor's Cartier Railway
Mining minister on UBS & the $200m bribe he is accused of accepting by Rio Tinto
How Glencore's $178bn trading division generates its wafer-thin margin