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Rio won’t say ‘yes’ to Glencore without 30% premium: ex-BHP exec

Making a tie-up unlikely due to a lack of synergies, says Alberto Calderon.

Rio Tinto Group shareholders would demand a premium of as much as 30 percent in any deal with Glencore Plc, making a tie-up unlikely due to a lack of synergies, Alberto Calderon, a former BHP Billiton Ltd. executive, said yesterday.

“The issue is mergers of mining companies generally don’t have synergies,” Calderon, a board member of Orica Ltd., told channel 9’s Financial Review Sunday. “The only way you have synergies is when you have overlapping operations like BHP and Rio had at the Pilbara. This is not the case here. I don’t think Glencore could afford to pay that premium.”

The Glencore deal with Rio Tinto would have been the industry’s largest. It would create the biggest mining company, worth more than $160 billion, and usurp BHP Billiton, with significant production of coal, iron ore and copper. Glencore abandoned the bid on Oct. 7 after it was rebuffed by Rio Tinto.

“In terms of a merger of equals, is it good for Glencore? It’s pretty fantastic,” Calderon said. “Is it good for Rio Tinto shareholders? It’s unlikely. They have the better assets. So they’re going to demand a premium of about 25 or 30 percent. And that’s synergies of about $25 billion, and so the short answer is that’s very unlikely. This merger would not even come close to creating that value.”

With about $6 billion of his personal wealth tied up in Glencore stock, Chief Executive Officer Ivan Glasenberg tends to be cautious about overpaying for targets. His company paid a premium of 10 percent or less in about two-thirds of the deals it carried out over the past decade, according to data compiled by Bloomberg.

Iron-Ore Slump

A slump in iron ore gave Glencore a chance to go after a cheaper Rio and make it part of a diversified portfolio. With the deal now likely on hold for six months, Glencore could turn to other targets such as Fortescue Metals Group Ltd. Or Rio could pursue a defensive deal with a company such as Anglo American Plc, according to Sanford C. Bernstein & Co.

Asked about Glencore’s options, and where Glasenberg might now train his sights, Calderon said: “The only thing that is clear” is that Glasenberg is always ahead of the market.

“I think this is part of a broader strategy,” he said. “We don’t know which one, nobody knows what he’s really thinking. But he’s thinking ahead of the market. He’s thinking about growth. He’s the only one of the large miners that doesn’t talk only about cost-cutting and so it must be something beyond this.”

©2014 Bloomberg News

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