/ 6 February 2008

BHP raises Rio bid; no immediate Chinese riposte

BHP Billiton launched a hostile $147,4-billion bid for mining rival Rio Tinto in a move that could trigger a Chinese-led counterbid in the world’s second biggest corporate takeover.

Combined, BHP and Rio would create the world’s third-richest company, with a market capitalisation eclipsed only by Exxon Mobil and General Electric. A merged company would dominate world supplies of dozens of important minerals, a prospect that has raised concerns among industrial buyers from Europe to China that it would have too much clout on pricing.

BHP sweetened its initial approach by 13%, offering 3,4 of its shares for every Rio share after a proposal of three shares for one in November failed to persuade the Rio board to agree to a friendly merger.

”This is our first and only offer,” BHP chief executive Marius Kloppers told a briefing, though he later would not say if that meant it was the final one.

”It’s a lot fairer than the offer we’ve had before, [but] it’s by no means a knock-out offer,” said Bertie Thomson, a fund manager at Aberdeen Asset Management, who holds both Rio and BHP shares.

BHP’s designs on Rio hit a speed bump last week when Aluminum Corp of China (Chinalco) teamed up with Alcoa to buy up $14-billion worth of Rio stock, giving it just over 9% of the company, the single largest shareholding.

A report in Britain’s Times newspaper on Wednesday said Chinalco and Alcoa were preparing a counter-bid for Rio, but sources familiar with the situation told Reuters the Chinese were in no rush to make a next move.

”Chinalco certainly would not go in with a $14-billion trading position without thinking about what might happen if BHP made an offer. This wasn’t a one-month $14-billion trading position,” said James Wilson, an analyst with DJ Carmichael & Co in Perth, Australia.

”Why does BHP really want to tempt the dragon? Chinalco has already made the message clear: they really do not want to see a merger,” said Geoffrey Cheng, director of equity research at Daiwa Institute of Research. ”You’re not going against a corporation. You’re going against a nation.”

Shares react

Shares in BHP, which also posted a 2,4% dip in first-half profit to $6,017-billion, fell 7,4% to Aus$36,69, while Rio was down 1% to Aus$126,20.

Rio was trading close to BHP’s offer, suggesting investors were betting Kloppers would stick with the 3,4 shares for one bid. BHP needs at least 50% of holders of Rio’s Australian and London shares to accept.

Some analysts doubted the sweetened bid would be enough to win Rio.

”Given our market conditions and the outlook, if you look at comparative mergers and acquisitions, it probably is not going to get there,” said Ken West, a Perennial Growth Management partner.

Kloppers said Rio had refused to discuss a merger, but he believed the offer still held widespread support among Rio shareholders, 60% to 70% of whom also hold BHP shares.

Kloppers said BHP had $55-billion in loans ready to support the bid and, as an added incentive, he promised a $30-billion share buyback if the deal goes through.

BHP said Rio shareholders would hold 44% of a merged entity, compared with 36% in the initial approach. The offer equates to a 45% premium to Rio’s stock price in November before BHP first raised the idea of a union.

Rio considers bid

Rio, which has argued it is better off as an independent company, said in a statement it was considering the offer, but advised shareholders not to take any action.

Big customers for both companies, particularly steel mills in China and Japan that buy hundreds of millions of tonnes of iron ore each year, have raised concerns about the potential dominance of a merged group.

Kloppers said the Chinalco/Alcoa share raid at Rio was ”just another factor” to contend with.

The Hong Kong-listed shares of Chinalco’s Chalco unit fell more than 11% on Wednesday.

”The offer should be enough to get BHP talking to Rio,” said Rob Patterson, managing director of Argo Investments, a fund manager. ”Raising the offer to that degree probably makes sense.”

A BHP/Rio deal would be the latest in a wave of big mining houses scooping up rivals to cash in on strong demand for minerals across Asia and elsewhere.

In 2006, Brazil’s Vale bought Canada’s Inco for $17-billion, paid for with a revenue boost stemming from high world iron ore prices. Vale has also said it was in talks with Anglo-Swiss rival Xstrata about a takeover, a deal that analysts calculate could top $100-billion.

Rio paid $38-billion last November for Canada’s Alcan, trumping an offer of $27-billion from Alcoa to become the world’s largest aluminium producer. – Reuters