While the reasons why the formerly secretive Glencore went public and joined the resource sector hoi polloi on the world’s stock exchanges aren’t clearly discernible – believe press releases by companies and corporate advisors or investment banks at your peril – chances are altruistic reasons didn’t figure.
Needless to say, quite the opposite.
But once public, CEO Ivan Glasenberg and his Glencore cohorts face the standard challenge for company founders. How to exit their stakes without frightening the peasants.
If Glasenberg tried to exit his Glencore investment, who would want to buy his stake and more particularly, at what price?
Linking with Rio offers an obvious potential solution.
Creation of a Rio-Glencore behemoth would much more easily allow Glasenberg et al to divest their (diluted) stakes – both from perception and market reality standpoints.
Meanwhile, fee-seeking investment banks have trotted out all the standard rationale as to why it might be a good idea.
“In our opinion, there would be material synergies from a merger, from Australian coal ($US500 million [$A577.04 million] plus), from marketing ($600 million plus or $1-2/t on iron ore plus bauxite/ aluminium etc), from head office/IT/ procurement ($300 million plus), as well as from tax/financing (US$100 million plus),” one said.
“It gives Glencore a dual-listed company structure and a global platform that competes with a BHP Billiton,” said another. “It provides immediate scale in iron ore enabling further value creation in the marketing business which could be worth $1-2/t through both Rio's extensive logistics and blending its superior product to sell into China.
“It has the potential to bring Glencore’s capital discipline to bear on an iron ore market in need of leadership and bring it into a balanced market. Operational synergies may be found ... Glencore stripped out C$2.5 billion ($A2.57 billion) in synergies out of Xstrata, 7% of the enterprise value of the deal. Rio's enterprise value alone is $US115 billion, implying synergies of $8 billion assuming same rate as Xstrata.”
And to be fair, both these investment banks did make minor mention that any deal would dilute Glencore management ownership and/or facilitate divestment.
While it all ultimately usually comes down to price/valuations, the problem for Glasenberg is that in terms of quality Rio’s assets seem to be considered as being in a different constellation versus the Glencore portfolio.
Indeed there’s a little whiff of BHP and Billiton circa 2001 about this proposed deal.
For a little over a decade after that transaction closed BHP Billiton is looking at divesting assets and becoming more focused. And London to a brick, if Rio and Glencore end up together, the very same will ultimately happen.
Glasenberg et al will probably be long time gone by then. Will Rio shareholders have benefited?
