wowzaBHP Billiton Offers to Buy Rio; Proposal Rejected (Update4)
By Tan Hwee Ann and Brett Foley
Nov. 8 (Bloomberg) -- BHP Billiton Ltd., the world's biggest mining company, plans to pursue a takeover of Rio Tinto Group after an earlier approach was rejected, in what may become the largest acquisition in history.
A purchase of Rio, which has a market value of $165 billion, would create a company that controls more than a third of the iron-ore market, supplies the most energy coal and copper, and owns mines and oilfields in six continents. Rio is the third-largest miner behind BHP and Anglo American Plc.
``If the name of the game at the moment is resources in the ground, then why pussyfoot with junior or medium-size miners when you can go to the top?'' Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London, said in a phone interview in London. ``This deal will happen, it's just a question of time.''
BHP, based in Melbourne and led by Chief Executive Officer Marius Kloppers, said in a statement to the Regulatory News Service it ``recently'' wrote to Rio's board with an outline merger plan. Rio stock jumped 32 percent as the company rejected the offer of three BHP shares for each one in Rio.
BHP shares traded in London slipped as much as 4 percent.
``It significantly undervalues Rio Tinto and its prospects,'' Rio, which has a dual listing in London and Sydney, said in a separate statement. ``The boards have unanimously rejected the proposal as not being in the best interests of shareholders.''
Rio Tinto shares rose as high as 5,740 pence, a record, and traded up 26 percent at 5,485 pence as of 1:47 p.m. in London.
A successful bid may eclipse the two biggest takeovers -- America Online Inc.'s purchase of Time Warner Inc., and Vodafone AirTouch Plc's acquisition of Mannesmann AG. For all of 2006, there were 1,145 deals in the mining industry, valued at $176.5 billion.
The combination would raise antitrust issues, particularly in the iron-ore market, said Charles Bailey, an analyst at Brewin Dolphin Securities in London. BHP, Rio and Brazil's Cia. Vale do Rio Doce control about 80 percent of the seaborne trade in the ore.
Better With Vale?
Rio, the world's second-largest iron-ore exporter after Vale, may now decide it's better to try to combine with its Brazilian rival, according to Ian Henderson at JP Morgan Asset Management in London.
``I can't conceive a competing bid from another company coming through,'' Henderson, who manages $7 billion in natural- resource assets, said in a phone interview. ``Rio and Cia. Vale do Rio Doce may throw their arms around one another instead.''
Vale spokesman Fernando Thompson declined to comment.
A combination of BHP and Rio would include assets such as a stake in Chile's Escondida, the world's largest copper mine, and the world's second-biggest uranium producer in Australia. The company also would have assets in aluminum, diamonds, silver, lead and nickel.
BHP's assets include Olympic Dam, Australia's largest underground mine that was acquired as part of the A$9.2 billion purchase of WMC Resources Ltd. in 2005. BHP hasn't made a major acquisition since. The mine's resources include 79 million ounces of gold, the fifth-largest deposit in the world, and the company may double copper capacity and almost triple uranium production at the site, BHP said in September.
Rio, which reported a 43 percent increase in profit last year to $7.44 billion, will become the world's largest aluminum producer this year after agreeing to buy Montreal-based Alcan Inc. for $38.1 billion. The deal is quadrupling Rio's output of the light metal used in planes and car parts, allowing it to surpass Russia's United Co. Rusal as the world's largest producer.
``Rio is a massive cash generator,'' Joe Youssef, a senior adviser at Macquarie Equities Ltd. in Sydney, said before today's statement. ``You can see why it's an attractive proposition based on its cash flows.''
BHP would be able to pay off the debt needed to make a $100 billion-plus bid for Rio Tinto in five to six years, Citigroup analyst Clarke Wilkins said in a May 4 note to clients. BHP also could cut $500 million in costs by combining the companies' iron ore and coal mines in Australia.
Some BHP investors expressed concern that the potential transaction needs to gain approval from Rio.
A merger is ``better done on a friendly basis because both are big companies,'' said Andrew Pullar, a portfolio manager at Baker Steel Capital Management LLP in London whose $900 million in assets include BHP stock. ``If it's going to be hostile, it's going to be a case of paying too much.''
To contact the reporter on this story: Tan Hwee Ann in Melbourne at firstname.lastname@example.org
; Brett Foley in London email@example.com
Last Updated: November 8, 2007 08:54 EST