Glasenberg: Under pressure to divest some assets.

By Clyde Russell
Launceston, Australia


It must be tempting for Rio Tinto Chief Executive Sam Walsh to contemplate whether he should buy Glencore, almost a year after fending off an unwelcome approach from his now beleaguered rival.
It’s safe to say the almost 30% plunge in Glencore’s shares to a record low on Monday has laid to rest any hope that the mining and trading company had of pulling off a merger deal with Rio Tinto, which is vying with Brazil’s Vale for the title of the world’s largest iron ore producer.
When Glencore boss Ivan Glasenberg mooted a deal with Rio Tinto in July last year, the shares were trading around 344 pence ($5.19), while those of Rio Tinto were around 3,244 pence.
By Monday, Glencore’s stock was down 80% to 68.62 pence, while Rio Tinto’s was at 2,111 pence, a drop of about 35%.
These numbers alone make any new bid by Glencore fanciful, but they do raise the possibility that Glencore itself is vulnerable.
Because Glasenberg controls 8.4% of Glencore stock, and another 8.17% is owned by Qatar’s sovereign wealth fund, it’s unlikely that any deal could be done without the approval of these two major shareholders.
Glasenberg is unlikely to want to sell out unless the price is right, and no doubt he will view the collapse in Glencore’s shares as an unjustified overreaction on the part of jittery investors who largely don’t understand commodity markets.
But even if the combative former South African, who made his name as a trader and deal-maker, first at Glencore and then by putting together its takeover of miner Xstrata, doesn’t want to sell, he may be forced to divest some assets.
Glencore’s main problem is its high debt of about $30bn and to tackle this it has just raised $2.5bn through a share placement and is said to be looking to sell its agricultural division for as much as $12bn, although that amount looks optimistic in the light of events this week.
With the plunge in the stock on Monday, several analysts have noted that Glencore’s equity value could fall to effectively zero, a sure sign that a white knight may be needed.
But would it be a good idea to buy Glencore?
The history of mega-mergers, or big deals, in the resource sector is not exactly encouraging.
BHP Billiton recently largely undid the marriage of its constituent parts, BHP and Billiton, with doubts as to whether the 14-year union added much to shareholder value.
Rio Tinto’s $38.1bn purchase of Alcan in 2007 has been described as the worst mining deal ever, while its $3.9bn acquisition of Riversdale for its Mozambican coal assets in 2011 ended in disaster.
Glencore’s own takeover of Xstrata in 2013 also looks like a bad idea now, since the market appears to have discounted the unique selling point at the time that combining a trader and a miner would limit the downside when times are tough.
However, one point worth noting is that many of the mega-deals are done when markets are at or near the peak, and company executives are under pressure to be seen to be building assets to take advantage of high prices.
A major deal at the bottom of the price cycle probably makes more sense, but at this stage it would take a brave board to sanction a move that would result in a substantial increase in debt or a substantial dilution in shares.
What makes more sense is to cherry-pick parts of distressed companies, especially if you have the view that the price of the commodity being produced has a solid longer-term outlook.
Glasenberg will be reluctant to hold a fire sale of some of Glencore’s best assets.
But he may be running out of time to convince the market the company is able to weather weak commodity prices and service its debt pile while maintaining the top credit rating necessary for its trading activities.
Glasenberg is used to being the hunter, now he will have to deal with being the hunted.
 
Clyde Russell is a columnist for Reuters. The opinions expressed are his own.