Rocky II

Glencore Rio takeover would be harder than Xstrata

A Rio Tinto takeover would be harder than Glencore's 2012 swoop on rival Xstrata. While there's some logic to a tie-up with the world's second-biggest iron ore producer, the Swiss miner-trader will be loath to pay a big premium, and the culture clash would be extreme. Rio is also in a better position than Xstrata to resist.

Ivan Glasenberg, Glencore's hard-charging chief executive, is fond of saying he'll buy anything for the right price. A sharp fall in the price of iron ore, down 40 per cent so far this year - and nearly 60 per cent from its 2011 peak - may have piqued his interest. Rio shares had slipped about 12 per cent since the beginning of the year before it confirmed it had rejected a summertime overture from Glencore. Its suitor's shares are up nine per cent over the same period, though Glencore's $70 billion market value is still smaller than Rio's $90 billion.

Diversifying into iron ore would run counter to fellow mining giant BHP Billiton's recent decision to split in two. But it would give Glencore more raw materials to feed into its trading business, and access to Rio's steel-clad balance sheet.

Perhaps most important, it would give Glencore the opportunity to run its quarry's assets differently. Rio has arguably contributed to recent price weakness in iron ore by continuing to invest in new capacity. Glencore, which has been a vocal critic of the industry's "obsession" with volume growth, might have a different view of where to put capital to work.

Such cultural differences may be the biggest obstacle. Yet it's also hard to see how Glasenberg can convince the Rio board to go for a lowball offer when, in contrast to Xstrata, Glencore isn't already a big shareholder. Glencore could always take its case directly to investors: according to Bloomberg, it recently met with Rio's leading shareholder, Chinese aluminum group Chinalco, which owns about 13 percent of Rio's London-listed shares. But a hostile bid would only increase the risk of a culture clash.

Add in the all-but-inevitable antitrust review by China, which may not relish the prospect of Glencore controlling even more of the country's supply of raw materials, and Glasenberg may have to dig deeper than he's willing to get a deal done.