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A test of M&A nerve: Rio Tinto coal assets elude Glencore

Yancoal named as the preferred bidder for Rio's Coal & Allied subsidiary, after two Glencore offers
June 29, 2017

Rio Tinto (RIO) is to sell its Australian thermal coal assets to Yancoal (AU:YAL), after the Chinese-backed outfit won a last-minute bidding war with Glencore (GLEN). Rio recommended that shareholders approve Yancoal's improved offer of $2.69bn (£2.1bn) for its Coal & Allied (C&A) subsidiary, in a deal that comprises $2.45bn in cash and a further $240m in guaranteed royalty payments before the end of 2018.

The recommendation - which was pending a shareholder vote when we went to press - is expected to pass, but Yancoal would have hoped for certainty a lot sooner. Indeed, the group agreed to pay $2.45bn for C&A in January, in a deal Rio chief executive Jean Sébastien Jacques said provided "outstanding value" for his shareholders.

On 9 June, Glencore bettered that offer by $100m, in an attempt to secure assets that include tenements adjacent to several of its existing mines in the Hunter Valley in New South Wales. Yancoal then matched the offer, before Glencore returned to the table with a $2.68bn all-cash deal and a promise to pay $225m if regulators blocked the acquisition.

Yancoal then matched this break fee and upped its royalty commitment, and with all relevant regulatory approvals waived or received, was accepted by Rio management for its higher level of completion certainty and faster and more certain timetable. The seller estimated the required approvals from regulators in China, Korea, Taiwan and Australia would delay a Glencore transaction until the first half of 2018 at the earliest.

Glencore's bid made logistical sense. Not only are C&A's pits in the Hunter Valley sandwiched between Glencore's, but they possess a higher energy content. Analysts at Investec have also suggested that together with the $920m purchase of Mitsubishi's minority stake, Glencore could extract synergies that would outweigh the deal's relatively high price tag. Recent form has shown Glencore to be particularly adept on that front.

Still, Rio Tinto also has its own broader strategic rationale for selling to Yancoal, whose parent company is ultimately the People's Republic. Not only is China Rio's most important customer, but the miner has been looking to improve relations with the country since it declined to sell a $19.5bn stake to state-owned aluminium outfit Chinalco in 2009. A year after the collapse of that deal - effectively a Chinese government bailout - Rio's former iron ore head in China was sent to jail over corruption and industrial espionage charges.

It's tempting to assume Glencore's management will be smarting at the moment. The failed bids for C&A followed admission of an "informal approach" for New York-listed Bunge (US:BG) in May, which was swatted away by the $10.3bn agricultural trading giant. Rubbing the salt in, Rio also couldn't resist including a dig at the "uncertainty of certain cash flows under Glencore's revised terms". Of course, the adage "nothing ventured, nothing gained" may be of some consolation to the commodities group, whose appetite for dealmaking and acquisitions has for several years been constrained by debt. But these are nervy times for diversified miners haunted by the memory of overvalued asset purchases last time around.