BHP Billiton raises hostile Rio Tinto offer
BHP Billiton, the world`s largest mining company, raised its hostile bid for Rio Tinto to US$147.4 billion after China`s biggest aluminum company sought to block the takeover.
BHPB fell the most in 20 years in Sydney trading after raising its offer 13% to 3.4 shares for every one of Rio Tinto`s.
The company reported its first drop in profit in more than five years on Wednesday, citing a stronger dollar, higher production costs and lower prices for some metals.
Chief executive officer Marius Kloppers raised the bid five days after Aluminum Corp of China (Chinalco) bought a stake in Rio to share in rising raw-material demand.
He said the combination of BHPB and Rio Tinto, the world`s largest mining takeover, would be able to ship more products faster to China, the biggest consumer of copper, iron ore, aluminum and coal.
"The Chinalco stake forced their hand and made them offer more than they would have been comfortable offering," Tim Barker, who helps manage and advise on US$54 billion of assets including BHPB and RioTinto shares at BT Financial Group, said in Sydney. "It`s probably enough to force Rio to start talking."
BHPB dropped 79 pence, or 5%, to 1,518 pence as of 8:48 a.m. on the London Stock Exchange. Earlier it slumped 7.5% on the Australian Stock Exchange, the biggest decline since December 11, 1987, amid a plunge in Asian stocks.
Rio Tinto fell 10 pence, or 0.2%, to 5,424 pence in London. The shares traded at a premium of 2.9% over the value of the bid, based on BHPB`s current share price.
Aluminum Corp. of China Ltd (Chalco) Chinalco`s publicly traded unit, declined as much as 12% in Hong Kong trading. State-owned Chinalco and Alcoa Inc. paid 6,000 pence (US$117.85) a share for a 9% stake in Rio last week.
That equated to 4.1 BHPB shares for every one of Rio Tinto`s London shares compared with BHPB`s initial three-for-one offer.
"Rio should be having a discussion," Don Williams, who helps manage US$1.3 billion at Platypus Asset Management, said by phone from Sydney on Wednesday.
He sold half of Platypus`s Rio Tinto holding on February 4 after the Chinalco and Alcoa transaction. "This ratio makes sense."
BHP`s bid values Rio Tinto at 13.6 times earnings before interest and tax, compared with the 13.7 times that Rio Tinto paid for Alcan last year.
Moody`s Investors Service may cut BHPB`s fifth-highest investment-grade ranking of A1 following the offer, the credit assessor said in a statement.
Standard & Poor`s on Wednesday affirmed BHPB`s rating and removed it from "negative creditwatch," which had implied that the company`s rating may be cut.
The risk of BHPB and Rio Tinto defaulting on their debt, as measured using credit-default swaps, increased to records. Contracts on the BHPB bonds, which rise as perceptions of credit quality deteriorate, gained 17.5 basis points to a record high 110 basis points at 5:18 p.m. in Sydney.
BHPB`s debt will increase almost seven times to about US$85 billion should the takeover proceed, said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney.
Credit-default swaps on Rio Tinto`s debt increased 10 basis points to 110 basis points. The price means it costs US$110,000 to protect US$10 million of debt from default for five years.
BHPB, which made an initial approach in November, had until February 6 to formalize its offer or walk away for six months after a U.K. Takeover Panel ruling.
Chinalco may be preparing a counter bid, the London-based Times newspaper said, citing unidentified people. Lu Youqing, vice president of Chinalco, wouldn`t comment on the newspaper report when contacted by telephone.
Chinalco and Alcoa said in a statement on Wednesday they will "closely monitor further developments."
"What BHPB faces is not just a state-owned company, but a country," Geoffrey Cheng, a Hong Kong-based mining analyst with Daiwa Institute of Research (HK) Ltd., said by telephone. "I don`t think Chinalco will make a general offer for Rio Tinto as it may face many regulatory hurdles."
China needs raw materials to feed an economy that grew 11.4% in 2007, the fastest in 13 years.
The nation`s biggest commodity companies, including Chalco, have said they`re concerned the combination would concentrate supplies and may wield too much pricing power.
"This is our first and only offer," Kloppers said in the media teleconference. "We absolutely want full control of this company," he said.
He wouldn`t say whether it would be the final offer, a declaration that would prohibit him from raising the bid.
Goldman Sachs Group Inc, Citigroup Inc and five more banks committed to providing the world`s biggest-ever loan at US$55 billion after the bid.
Goldman and Gresham Partners are BHPB`s principal advisers. Citigroup, HSBC Holdings Plc, Lazard & Co Ltd, Merrill Lynch & Co Inc and UBS AG were hired by BHPB.
Rio Tinto hired Morgan Stanley, Macquarie Group Ltd, Credit Suisse Group and NM Rothschild & Sons Ltd as advisers.
Kloppers, who started in the job on October 1, is asking Rio Tinto shareholders to back his management over that of his counterpart Tom Albanese, who began as CEO in May last year.
BHPB may have to increase the offer to between 3.4 and 4.25 shares to win agreement from Rio Tinto, said Chuck Bradford, an analyst at Soleil Securities Corp in New York.
Rio Tinto will study the terms of the proposal, the company said in statement on Wednesday.
Tom Albanese had said the earlier offer was "several ballparks away" from fair value. Kloppers has pledged to generate US$3.7 billion in cost savings and revenue gains by buying Rio Tinto.
BHPB has outperformed Rio Tinto on total shareholder return since BHPB was dual-listed in Australia and London, Kloppers said.
Rio Tinto has been trading at a premium to the November offer price, indicating some investors expect an increase.
It surged February 1 when state-owned Chinalco and Alcoa bought their stake.
Kloppers wouldn`t comment on whether he had met with Chinalco and Alcoa since they bought the stake.
Chinalco President Xiao Yaqing said February 4 there were no plans to raise the stake. Alcoa will examine the offer, company spokesman Kevin Lowery said by phone from Pittsburgh.
The offer is subject to approval from antitrust agencies in the European Union, the U.S., Australia, Canada and South Africa. It also requires approval from the Foreign Investment Review Board in Australia.
On Wednesday, BHPB reported a surprise 2.4% drop in first- half profit to US$6 billion. This compares with the US$6.3 billion median estimate of seven analysts surveyed by Bloomberg News.
Credit-default swaps, originally conceived to protect creditors against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to keep to its debt agreements.
(Bloomberg, February 6)
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