Barry Fitzgerald
November 12, 2007
BHP Billiton retreated to its bunker at the weekend to plan its next move in what some are describing as the mother of all takeover battles — the group's $US140 billion-plus ($A153 billion) assault on London blue blood of the industry, Rio Tinto.
Suggestions that BHP would try to turn the heat up on Rio's board by making public at the weekend the letter it wrote to Rio outlining its "compelling" and "unique" case for the since-spurned three-for-one scrip-only offer proved to be off the mark. It still might see the light of day.
With Rio continuing to say it would not take up BHP's follow-up invitation to at least talk about the merits of the scrip offer, a Mexican stand-off is under way pending BHP's next move.
That left the British media speculating that China Development Bank was considering buying a blocking stake in Rio to maintain the status quo in the global iron ore industry. The only Western corporates considered potential players, Xstrata and Anglo American, could be doing the same, the media reasoned.
Xstrata and Anglo were noticeably weaker on Friday, with investors worried about the risks associated with taking BHP on, or more to the point, what would happen to the value of any Rio shares they were acquiring if BHP were to eventually walk away. Meanwhile, rumours continue that Xstrata could be close to merging with its 35 per cent shareholder, Glencore.
Pressure on BHP's share price caused by general market malaise has seen the imputed value of its share swap — which remains only a proposal — dwindle to $127.41 a share. In the meantime, expectations that BHP will have to substantially increase its offer or walk away within eight weeks under British takeover laws kept Rio shares firm in London trade on Friday after it closed on the ASX at $130.90, up $17.50 a share.
The suggested offer from BHP represented a thin 14 per cent premium to Rio's previous all-time high of $113.50, set in mid-October. Rio has made clear that the board would have trouble endorsing any offer that did not contain a 65 per cent premium to its all-time-high share price, as Rio paid in its recent $US38 billion acquisition of Alcan.
That suggests a price of about $180 a Rio share, even if BHP argues it is an unfair comparison given that Rio paid cash for Alcan in what was a takeover and not the sharing and caring merger that BHP has painted its offer for the fiercely independent Rio as.
Rio has been gaining support from unaligned analysts for the notion that BHP will have to pay a lot more if it wants Rio's endorsement for a merger. MF Global Securities' London desk said it expected the offer would be raised by about 15-20 per cent (about $150 a share) with a possible cash sweetener.
"Rio shareholders should expect a charm and an argument offensive from BHP, which will be second to none," MF said.
Local broker Austock said rather than the three-for-one proposal, an offer of 4.4 BHP shares for each one Rio could be needed ($186 a Rio share).
Austock analyst Tim Gerrard said BHP's move made sense, whether it was a question of optimising asset returns, meeting the challenges of sustainable development, building and maintaining a technically proficient workforce, sharing the risk on new technology or the prospect of being re-rated by virtue of its position as one of the world's top five companies by market capitalisation.
"However, the price needs to be right and the next few months will be interesting as Rio is forced to build its case as to what is the right price," he said.
He said it would be difficult for Rio not to engage with BHP. "Presumably that stage can be reached sooner rather than later if BHP comes back with a more serious effort," he said.
The reporter owns BHP shares.(theage)
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