Rio Tinto and Glencore are expected to announce an extension to merger talks ahead of a UK regulatory deadline on Thursday, to allow Rio more time to study the merits of any deal, three people familiar with the talks said.
However, Rio Tinto could walk away, amid pushback from some investors including some in Australia, who want to be assured a deal will create value and who strongly oppose Rio Tinto paying a premium, one of the people said.
In January, the companies said they were in early talks for a merger in what could create the world's largest mining company with a combined market value of nearly $207 billion with access at scale to copper, in high demand for the energy transition.
Under UK takeover rules, a potential bidder has 28 days from being identified to either announce a firm intention to make an offer, walk away or seek an extension. The current deadline is February 5.
If Rio Tinto were to seek an extension, Glencore would happily oblige, according to one source with knowledge of the matter.
Rio Tinto and Glencore spokespeople declined to comment ahead of Thursday's deadline.
One of the key concerns for Rio Tinto investors is that Glencore is holding out for a big premium when some of its copper developments are still at a very early stage. They also questioned the value Glencore's marketing arm would bring.
Market volatility that includes wild swings in commodity prices and a run-up in copper has added to headaches over valuation.
"With copper at $14,000 Rio needs a lot of thinking," one of the sources said.
The three people familiar with the talks declined to be named as the discussions are confidential.
Sceptical shareholders
Several Australia-based investors have told Reuters they would not be happy with any deal that involved a premium for a company that has faced operational challenges, and they had yet to see how such a tie-up would demonstrate value.
"We expect an extension later this week as a face-saving device," said Hugh Dive of Atlas Funds, which has shares in Rio and does not support any tie-up.
He said apart from Glencore's South American copper assets, the rest were complicated and outside of Rio's interest, while there were incentives for Rio Tinto, paying with scrip, to overpay as it seeks to dilute the stake of its top UK shareholder, state-owned Aluminium Corp of China (Chinalco).
Rio Tinto is exploring a potential asset-for-equity swap with Chinalco that would trim the Chinese investor's 11% stake, freeing up Rio to resume buybacks and pursue new strategic deals, sources told Reuters last year.
Australia is home to more than 20% of dual-listed Rio Tinto's shares but more than half of its profits, which stem from its lucrative iron ore mines.
"You want to feel any deal is a win-win for shareholders and you don't want to be paying away all of the upside," said Andy Forster, a portfolio manager at Adelaide-based Argo Investments.
The Financial Times reported on Thursday that Rio Tinto is pushing for its chair and CEO to retain their roles, while Glencore is holding out for a hefty premium.
In acquisitions of unequal size, the largest, generally the acquirer, typically keeps its management team. Rio Tinto's market capitalisation is roughly double that of Glencore.
Trading and geopolitics
While copper is an obvious motivation for a deal, some sources said Glencore's commodities trading arm, which has a reputation for capitalising on market volatility and a broad network of trading contacts, was another part of the appeal amid geopolitical uncertainty.
Investors, however, questioned whether those traders could be incentivised to stay on in a Rio Tinto culture that had much lower risk appetite.
Adding fuel to Rio's considerations, Glencore this week said it is in talks to sell a 40% stake in its copper and cobalt operations in the Democratic Republic of Congo to a U.S.-backed consortium in a deal valuing the assets at about $9 billion.
Any proposed tie-up could also require asset sales to secure regulatory approval from top commodity buyer China, which has longstanding concerns about resource security and market concentration, Reuters has reported.
(Reporting by Melanie Burton in Melbourne and Clara Denina in London; Additional reporting by Amy-Jo Crowley and Anousha Sakoui in London and Divya Rajagopal in Toronto; Editing by Sonali Paul)
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