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BHP raises Rio bid; no immediate Chinese riposte
2008-02-06
BHP Billiton (BHP.AX) launched a sweetened but hostile $147.4 billion bid for rival miner Rio Tinto (RIO.AX) on Wednesday, ending months of speculation and setting the stage for the world's second-largest takeover. BHP hopes to sell Rio shareholders its idea of assembling a super miner, supplying the lion's share of the world's industries with millions of tonnes of minerals, but runs the risk of igniting a bidding war with Rio's largest shareholder, state-run aluminum group Aluminum Corp of China (Chinalco). BHP (BLT.L) improved its initial approach by 13 percent, offering 3.4 of its shares for every Rio (RIO.L) share after a November proposal of three shares for one failed to persuade the Rio board to bless a friendly tie up. "Rio Tinto shareholders will now decide," BHP Chief Executive Marius Kloppers told reporters. He added: "This is our first and only offer," though he later would not say if that meant it was the final one. Some analysts doubted the sweetened bid would be enough to win Rio and create the world's third-richest company, ranked behind only Exxon Mobil (XOM.N) and General Electric (GE.N). A successful marriage would be the world's second biggest takeover, ranking only behind Vodafone's (VOD.L) $172-billion purchase of Mannesmann in 1999. "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 (ADN.L), who holds both Rio and BHP shares. Shares in BHP, which reported a 2.4 percent dip in first-half profit to $6.017 billion, tumbled 7.5 percent to A$36.66 in Sydney -- their steepest one-day percentage fall in 20 years. They traded 4.95 percent weaker in London at 15.15 pounds by 7:00 a.m. EST. Rio slipped 0.4 percent to 54.15 pounds. 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 percent of holders of Rio's Australian and London shares to accept. London share prices value Rio at a price earnings ratio of 21, versus 14 for BHP, 12 for Anglo American (AAL.L) and 19 for Xstrata (XTA.L), a possible bid target of Brazil's Vale (VALE5.SA). CHINA HOLDS FIRE BHP's designs on Rio hit an obstacle last week when Chinalco teamed up with Alcoa Inc (AA.N) to buy $14 billion worth of Rio stock, giving it just over 9 percent of the company. Chinalco and Alcoa, with funding available from China Development Bank, have reserved the right to make an offer for Rio if there was another bid, but sources familiar with the situation told Reuters the Chinese, just beginning the Lunar New Year holiday, were in no rush to make a move. "There's no need to get shot-gunned into anything," said a source with direct knowledge of Chinalco's plans, who declined to be named because of the sensitivity of the situation. "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 (H.K.) Ltd. "You're not going against a corporation. You're going against a nation." Kloppers said the Chinalco/Alcoa share raid was "just another factor" to contend with. "The acquisition of 12 percent by Chinalco at a price of 60 pounds per share does not set a benchmark for an all-share offer for the whole of Rio Tinto. It's the price Chinalco had to pay to secure a strategic stake during a market raid." The Hong Kong-listed shares of Chinalco's Chalco unit (2600.HK) (601600.SS) fell more than 11 percent on Wednesday, reflecting in part the premium Chinalco paid for its Rio stake. Kloppers said BHP had $55 billion in loans ready to support the bid and, as an added carrot, promised a $30 billion share buyback if the deal goes through. BHP said Rio shareholders would hold 44 percent of a merged entity, compared with 36 percent in the initial approach. The offer equates to a 45 percent premium to Rio's stock price in November before BHP first raised the idea of a union. Larry Grace, an analyst at Kim Eng Securities in Hong Kong, said he expects Chinalco and Alcoa to make a counterbid for Rio. "I think they now come back with something even pricier, and put pressure on BHP. The goal will be to make it too expensive for BHP, even though their own bid would be up for being blocked by Rio's board or regulators," he said. RIO CONSIDERS BID Rio, which has argued it is better off on its own, said in a statement it was considering the offer, but advised shareholders to take no 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 power a merged group would have on pricing of raw materials. A BHP/Rio marriage would be the latest union 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 and Rio paid $38 billion last November for Canada's Alcan. (Additional reporting by Sonali Paul and Victoria Thieberger in MELBOURNE, Denny Thomas in SYDNEY, Tom Miles and Nao Nakanishi in HONG KONG and Eleanor Wason, Laurence Fletcher, Mark Potter and Eric Onstad in LONDON; Editing by Ian Geoghegan/Rory Channing)
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