As Glencore PLC And Royal Dutch Shell Plc Grow Restless, Will 2015 Be The Year Of The Mega-Merger?

Are mega-mergers in the works at Glencore PLC (LON: GLEN), Royal Dutch Shell Plc (LON: RDSB), Rio Tinto plc (LON: RIO), BHP Billiton plc (LON: BLT) and BP plc (LON: BP)?

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2014 has been a mixed year for the market. On one hand, real-estate investment trusts and healthcare companies have performed well, while on the other, oil & gas shares as well as many miners have underperformed.

However, with valuations at a multi-year low, there are plenty of bargains out there and many companies are sitting on huge piles of cash. So, will 2015 be the year of the mega-merger, as CEOs splash the cash and snap up undervalued assets? 

Looking for opportunities 

One company that will be looking out for possible acquisitions is Glencore (LSE: GLEN).

Glencore, which is controlled by its CEO and largest shareholder Ivan Glasenberg, likes to buy out competitors at the bottom of the business cycle at the lowest possible price. Indeed, with its trading and marketing arm, Glencore is able to ride out market downturns better than most. Therefore, when the market takes a turn for the worst, Glencore is often the only miner with enough fire power to fund transformational deals. 

And the company is already weighing up its next target, Rio Tinto (LSE: RIO). The two mining giants have been in talks this year, although so far, Rio has spurned Glencore’s advances.

Nevertheless, Rio gains almost all its earnings from iron ore, the price of which has slumped by more than 50% this year and Rio’s share price has followed suit. So, as Glencore waits, the price it needs to pay for Rio is falling.

Moreover, some analysts have estimated that up to $20bn in cost saving synergies could be achieved through a Rio-Glencore merger. It would be hard for Ivan Glasenberg to pass up that kind of return. 

South32

Glasenberg could also go after BHP Billiton’s (LSE: BLT) spin-off which has been named South32. The new company will get around 75% of earnings from manganese, coal and silver-related metals and could be an attractive bolt-on acquisition for the Glencore empire. 

That being said, the timing of this spin-off has recently been called into question. Weak investor sentiment surrounding the commodity industry has depressed the valuations of stocks across the sector. It’s not a great time to be launching a new company. 

Falling oil creates opportunities 

Over in the oil sector, rumours have recently surfaced suggesting that Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) might be in the process of discussing a merger. This is nothing new; in fact, a merger between BP and Shell has been discussed many times before.

But could it be different this time?

BP is currently one of the most undervalued oil companies on the market and Shell would get a great deal if it snapped up its smaller peer. However, BP’s exposure to Russia is concerning, and the company is still paying out compensation claims to residents following the Gulf of Mexico disaster.

Then there are regulatory issues to consider. Both BP and Shell operate in similar regions around the world and a merger would put one company in total control of several regional markets. 

Overall, then, there could be too many risks, uncertainties and hurdles to jump over for a deal between Shell and BP to go ahead.  That being said, if the price is right, I’m sure Shell’s management would figure out a way to make the deal work so I wouldn’t rule out a deal completely.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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