Glencore should give ground to seal a deal with Rio Tinto

With the benefit of hindsight, it’s clear who got the better deal in the mining industry’s largest deals to date. Time – and iron ore prices – proved that Billiton needed BHP more than vice versa in their $US57 billion tie-up in 2001. Time and aluminium values showed Rio Tinto needed Alcan a lot less than the other way around in their $US38 billion deal in 2007.

The historical lessons are important as two of the sectors top players, Rio Tinto and Glencore, debate a merger.

Obviously, who has the most to gain is far less clear when a deal is revealed — let alone in the heat of negotiations. Everyone likes to talk about mergers of “equals” and “win-win” acquisitions. It’s typically nonsense. Gauging who’s leaving money on the table demands assumptions that are years, if not decades, in advance about commodity prices, geopolitical risks and investor appetite. At best, it’s art rather science; at worst, it’s based on gut feelings.

Looking at the potential merger of Rio Tinto and Glencore — “GlenTinto,” as some bankers have dubbed it – my gut says that Glencore, which is worth about $US55 billion ($89 billion) plus debt, needs the deal more than its rival, which is worth $US100 billion. So if either side needs to compromise on valuation to get a transaction done, it’s Glencore that needs to make sacrifices now to secure a better future.

Good luck with that. Glencore’s largest shareholder is the company’s former boss, Ivan Glasenberg – a South African who’s loath to compromise. Under his stewardship, the firm, which mixes mining with a huge trading business, sold shares to the public in 2011 at £5.30 per share. Since then, out of about 3,460 days trading on the London Stock Exchange, the stock has spent just 71 days above its initial public offering price.

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Nevertheless, Glencore executives have a reputation of being among the smartest guys in the room, which will make Rio board members wary that whatever terms are offered, they’ll come off second best.

That’s a shame; the combination would create a business worth more than the sum of its current parts. Jakob Stausholm and Gary Nagle, chief executive officers of Rio and Glencore respectively, held abortive merger talks last year in October and November. Both companies are mum about what comes next, but the body language suggests talks can re-start. Rio, which dismissed previous overtures from Glencore, appears far more receptive this time. And by engaging in the discussion, Glencore has hung a “for sale” sign above its door.

The industrial logic focuses on three commodities, two distinct to each company, while the third is shared.