June 21, 2017 / 6:11 AM / 3 months ago

Glencore misreads Chinese tea leaves in bid battle

Rio Tinto Chairman Jan Du Plessis (L) and Chief Executive Jean-Sebastien Jacques conduct a news conference at the company's annual general meeting in Sydney, Australia, May 4, 2017. REUTERS/Jason Reed

HONG KONG (Reuters Breakingviews) - Rio Tinto prefers Chinese money today to Swiss cash tomorrow. Late on Tuesday, the Anglo-Australian miner’s board opted for an upgraded $2.45 billion bid from Yancoal, instead of taking $100 million more from Glencore. Concerns about Chinese regulators must have played a role. The Swiss trader might need to come up with lots more money to stay in the game.

On June 9, Glencore submitted a late-breaking $2.55 billion bid for Rio’s Coal & Allied division. That came five months after Rio accepted a not-quite-financed pitch from Yancoal, the Australian arm of a heavily indebted state-owned firm from Shandong province. At first, this looked like a shrewd attack on a weak competitor - but Glencore seems to have misread the depth of Yancoal’s support.

Two days later, Yancoal’s bid suddenly got the regulatory green light back home. The intervention then prompted Yancoal’s parent to come back with payment guarantees, and promise cash upfront, and that appears to have assuaged Rio’s worries.

Glencore’s bid is still higher. The deciding factor, alluded to in Rio’s statement, appears to be concern about whether Glencore would get official approval in a “timely manner”.

That presumably refers primarily to Chinese regulators. Economically there’s little reason for the Ministry of Commerce to object to Glencore’s bid on antitrust grounds. Almost none of Coal & Allied’s output is sold to China. But that doesn’t mean MOFCOM has to move quickly. Rio also does plenty of business in China, and counts state-owned Aluminum Corp of China as its largest shareholder. That probably influenced the board’s thinking, too.

It is unclear whether Glencore will actually engage in a bidding war. It certainly has more firepower, but has also promised to keep debt under control.

However, MOFCOM, or the fear of MOFCOM, is playing an unhealthy role here. The regulator is supposed to safeguard competition in China, not reinforce bids by state-owned enterprises for offshore assets. Commercially speaking, this deal could result in a weaker bidder defeating a larger, more sophisticated rival that could extract far more synergies, given that it owns properties next door. Still, Rio can be forgiven for playing it safe.

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