Glencore (LSE: GLEN) has a ‘thing’ for Rio Tinto (LSE: RIO) and plucked up the courage to make a pass at its object of desire last August.
To Glencore and some other observers a pairing of the two commodity firms seemed like it would create a good fit in terms of geography and diversification of operations. Economies of scale could then be realised and the two firms could romp off for a future of blissful togetherness.
No thanks!
Rio was unimpressed and turned down Glencore’s offer. Yet Glencore wasn’t put off and said it wouldn’t rule out trying again, as the thought of creating an attractive $160 billion mining and trading monster wouldn’t go away.
Rules in the UK allow Glencore to make a fresh overture from April onward. However, Glencore’s confidence must be waning, as its shares slipped by an embarrassing amount greater than Rio’s since October, causing the gossipers to question whether the couple are a suitable match after all.
Rio’s chief executive certainly doesn’t think they are. He recently came straight out and said Rio Tinto will not be taken over by rival Glencore because there is no value in it for shareholders and regulators will never let it happen. He’d previously explained that it could never work out between them because of a clash of cultures — Glencore is a trading company and Rio Tinto is a mining company. The firms have different operational and strategic time horizons, he reckons. So, that’s the end of it then.
Will Rio Tinto ever find a mate?
This isn’t the first time Rio Tinto gave a suitor the cold shoulder. Back in 2008, BHP Billiton (LSE: BLT) was sweet on Rio. It was a similar story back then, with Rio turning its nose up on value grounds, and regulatory opposition getting in the way of the wooing process.
Glencore will need to get over its unrequited love for Rio Tinto, perhaps by sentimental reflection of a previous romance in 2013. Back then, Glencore bid successfully for another rival, Xtrata, so perhaps it’s too soon to start a new romance anyway.
There’s no doubt that Rio Tinto has the most feminine and attractive-sounding name of all the commodity-related firms on the London market. That, and the company’s sizeable and well-proportioned assets, could incite further approaches from admirers in the future. However, based on Rio’s record of aloofness to potential partners, I reckon Rio Tinto shareholders should make sure they don’t price in any takeover premium when valuing the firm for investment purposes.
At a share price of 3,190p Rio Tinto trades on a forward P/E rating of 13 for 2015 with a dividend yield running at around 4.7%. That may seem attractive, but we should take a view on the macro-economic cycle and where commodity prices may be heading before investing.