• Cross shareholding could soften coal pushback
• Post-completion break up seen as more likely

Rio Tinto is likely to structure a potential takeover of Glencore to incorporate the entire company, eschewing a pre-conditional break-up of the target, a source familiar with the matter and two sector bankers following the situation said.

While Rio Tinto is seeking to gain scale as the world’s largest mining company and to ramp up its copper production, Glencore wants to realise value for its red metal portfolio, the source, three bankers and a sector executive, said.

This meeting of minds is likely to overcome any aversion by the buyer towards Glencore’s coal assets and commodity trading division, the first, and a second source familiar with the matter, and one of the bankers said. Those businesses are believed to have contributed to previous talks between the two companies being terminated without a deal.

Before the London market opened on 9 January, UK-listed Glencore and UK and Australia-listed Rio Tinto separately announced that they are engaged in preliminary discussions regarding a possible combination of “some or all of their businesses, which could include an all-share merger” between the two mining majors.

The transaction would likely be executed as a scheme of arrangement with Glencore as the target, according to the announcements. They further noted that Rio Tinto has until 5 February to announce whether or not it intends to make a firm offer for Glencore – a deadline that can be extended subject to consent from the Takeover Panel.

Together, GBP 52.7bn-market cap Glencore and GBP 103.17bn (AUD 200.44bn) market cap Rio Tinto would become the world’s largest mining company, outpacing rival major BHP. The two companies were reportedly engaged in unsuccessful merger talks in late 2024, although neither company ever confirmed this.

Rio Tinto is seeking scale and is likely to target a simplified deal that avoids much of the complexity in the form of pre-completion disposals that impacted the success of BHP’s approach to Anglo American last year, one of the sources said.

Rio Tinto is particularly keen to grow its copper business, the scramble for which has driven so much recent M&A, including the ongoing merger between Anglo American and Teck Resources, the source, four bankers and the executive said.

Meanwhile, Glencore’s retention of coal has seen it trade a discount to its peers. Its share price is being held back by other assets, such as the coal, and so it has sought ways to realise better value from its copper portfolio, one of the bankers noted.

However, those coal assets are likely to be viewed less negatively than in the past, another of the bankers said.

One of the source put forward a similar argument, noting that Glencore’s shareholders voted in 2024 to keep the coal assets in the business and many of those investors are also shareholders in Rio Tinto.

The top 20 Glencore shareholders own 45% of its share capital, according to Dealogic data. Thirteen of them are also shareholders in Rio Tinto, owning a combined 31% of that company.

That said, the challenge is on for Rio Tinto to structure a potential deal to be attractive for its shareholders, many of which are unlikely to see long-term strategic value in the coal, and other parts, of the Glencore businesses, several of the bankers and the executive said.

Rio will want Glencore’s copper and zinc but is unlikely to be interested in thermal coal, vanadium, ferrochrome and manganese, which one would expect will be disposed of soon after the transaction, if not before, the executive argued.

While most of the Glencore portfolio would likely remain in Rio Tinto, the thermal coal business will likely face a quick disposal, one of the sources agreed.

Glencore’s commodity trading business is also unlikely to be attractive to Rio Tinto, two of the bankers said.

A separate banker didn’t agree, noting that structure and value are linked. Rio needs to demonstrate to its shareholders the value it can extract from the merger through synergies – which may include leveraging the strategic advantage of the commodity trading division – as well as the ultimate perimeter of the combined company, this banker said.

Ultimately, the market is increasingly favouring pure-play commodity mining companies, and the question will be whether the advantage of this approach is outweighed by the advantages of scale, another of the bankers said.

Cultural differences between the two companies may also prove a challenge, two of the bankers said, referring to Rio’s mining focus versus Glencore’s trading mindset.

The company announcements didn’t include any mention of advisers. JPMorgan is the corporate broker to Rio Tinto, but does not currently have a specific advisory mandate on this deal, a third source familiar with the matter said. Likewise, while Citi is Glencore’s broker, the company has not retained any lead transaction advisors in relation to a possible Rio Tinto tie-up, another of the sources added.

According to a fourth source, Weil, Gotshal & Manges is mandated as legal advisor to Glencore. A&O Shearman is advising Rio Tinto, a fifth source added.

Glencore and Weil, Gotshal & Manges declined to comment.  A&O Shearman and Rio Tinto did not respond to requests for comment.