Glencore Rio shares face reckoning on merger talk
Rio Tinto’s US shares surged as much as 20% higher after news reports emerged tonight suggesting Glencore was “laying the groundwork for a potential merger”. […]
Rio Tinto’s US shares surged as much as 20% higher after news reports emerged tonight suggesting Glencore was “laying the groundwork for a potential merger”. […]
Rio Tinto’s US shares surged as much as 20% higher after news reports emerged tonight suggesting Glencore was “laying the groundwork for a potential merger”.
Bloomberg News reported about half an hour after the end of official trading on the London Stock Exchange that Anglo-Swiss trading and mining giant Glencore Plc. reached out to Rio’s largest shareholder, Chinese-state-backed Aluminum Corp. of China.
Glencore wanted to gauge interest by the Chinese firm, also known as Chinalco, in a potential deal, according to the news reports.
Chinalco held 12.91% of UK-based mining group Rio Tinto Plc. according to a filing posted in March of this year. That has reportedly since fallen to about 9.8%.
News reports stress that formal talks have not begun, and they may never do so.
Additionally, there is currently no formal offer for Rio on the table, with no offer expected before the end of 2014.
Glencore could of course decide against an offer, sources said, according to Bloomberg News.
The market appears to like the possibility of a deal, even though there is little concrete evidence that the deal talk was based on anything more substantiated than rumour and speculation.
Following the rapid surge immediately after news reports of a potential deal emerged, Rio’s American Depository Receipts (ADR) continued to trade between 7% and 8% higher.
(An ADR is basically a US version of an overseas stock.)
Glencore’s London shares closed more than 2% higher before news of the potential tie-up was reported.
A spokesman for Glencore replied to questions from news agencies by saying: “we don’t comment on market rumour or speculation”.
Rio Tinto also reportedly declined to comment.
Experienced market participants will recognise these as ‘stock responses’, often, if not always used by firms which themselves might be the original, albeit unofficial, source of the speculation in the first place.
The main motivations for stoking market talk in such situations often include:
1. To drum-up market interest in a speculated deal, thereby getting a rough idea of how the market would react to a deal in the event that it was ever confirmed.
2. To ‘fly a kite’ over main stake holders (in this case Chinalco and others) to judge how likely they would be to support such a confirmed intention to merge.
Provisos and official neutrality aside, we see several strong reasons why both Glencore and Rio may have decided to seize the moment to make preparations for a merger.
And why they may want to make their unofficial intentions public too.
Even setting aside the highly dicey nature of today’s deal talk, there would be major obstacles to a deal taking place.
We expect many of these concerns to be at the forefront of the minds of investors in both Rio Tinto and Glencore, when their main FTSE 100 shares resume trading on Tuesday morning.
It is possible Glencore may bear the brunt of any negative market reaction to a suggested tie-up with Rio, given Glencore stock had gained about 12% in the year to date before speculation of a deal emerged this evening.
Glencore stock looks at least moderately vulnerable on a two-hourly basis, even if there appears to be a bias towards buying momentum.
The case of the stock breaking out of its trend channel in the medium term looks balanced at best.
Rio’s London-listed stock has a much better chance of catching-up with the froth of its American version than Glencore.
However, the stock’s recent history suggests froth alone may not be sufficient to propel it above the circa-3050p mark, where both an important moving average and an observable pivot line coincide.