BREAKINGVIEWS-Rio Tinto and Glencore can meet each other halfway

By Karen Kwok

LONDON, Jan 14 (Reuters Breakingviews) - Rio Tinto RIO.L and Glencore’s GLEN.L long-awaited union looks a case of third time lucky. The $140 billion Australian miner, led by new CEO Simon Trott, has until February 5 to table a bid for Swiss miner-trader Glencore, run by Gary Nagle. So long as both stay focused on what matters, the pair can cut a mutually beneficial deal.

This isn’t the two companies’ first dance. The duo held talks in October 2024, and as far back as 2014 Glencore’s then-boss Ivan Glasenberg floated the idea of a merger. The sticking point remains the same: finding a structure that keeps both shareholder bases from walking off-site. Rio is nearly twice Glencore’s size, making a “merger of equals” like the proposed nil-premium Anglo American–Teck structure harder to engineer.

Nagle will hanker after a 30% premium. If Trott offered one, Glencore would be worth $104 billion based on its January 8 market capitalisation, including $14.5 billion of net debt. But that would imply a valuation of 5.9 times expected 2027 EBITDA, per Visible Alpha-compiled analyst estimates, which may give Rio investors pause. Their own valuation is 5.7 times, and Glencore has on average traded at 4.4 times expected EBITDA over the last five years.

Rio, meanwhile, would prefer a nil-premium merger. Assume $9.6 billion of Glencore operating income in 2031, per Visible Alpha. That would mean an 8.7% return on invested capital even without synergies, above RBC’s estimated 8% cost of capital for Glencore. But that might leave Glencore shareholders, the largest of whom is Glasenberg, feeling short-changed.

Trott and Nagle could instead meet each other halfway. If Rio offered a 15% premium, Glencore would be valued at 5.2 times 2027 EBITDA, but Rio investors could still get a return around 8%. Trott could tell his investors that the outperformance of their company’s shares versus its target’s means they stand to get 65% of the company, rather than 63% in October. Nagle could say his shareholders get a premium of around 30% compared to Glencore’s share price in September 2024.

Some investors might still carp. But it makes strategic sense to combine Rio’s strong balance sheet with Glencore’s roster of promising near-term copper projects. There’s scope to drive value by splitting the company into an Australian-listed iron ore and coal group and a copper-focused transition metals star. Alternatively the $215 billion Rio-Glencore would be well-placed to outbid $163 billion BHP BHP.AX in future battles for other choice copper assets.

All this ignores the other reason for doing a deal: synergies. The recent Anglo-Teck deal targets $800 million of cost-synergies, and RBC analysts assume at least $1.5 billion for Rio-Glencore. Taxed and capitalised, that’s at least $10 billion for Trott and Nagle to share - enough not to obsess over the details.

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CONTEXT NEWS

Rio Tinto is in early talks to buy Glencore, the companies said on January 8.

Under UK takeover rules, Rio Tinto has until February 5 to make a formal offer for Glencore or say it will not proceed.