bhp dampens bid expectations

From The TimesJanuary 19, 2008

BHP dampens hopes of an increase in its £70bn offer for rival Rio TintoDavid Robertson in Perth
BHP Billiton, the world’s largest miner, is unlikely to raise its £70 billion bid for Rio Tinto and may even walk away from the deal as stock markets and the global economy continue to sour.

Senior industry sources insist that BHP has no appetite to sweeten its three-for-one share offer for its rival and may choose to take a break of up to 12 months from a deal that would create the largest company listed in Britain.

Rumours circulated the Australian stock market yesterday suggesting that BHP would make an improved offer on Monday. There was talk that BHP would offer 3.58 shares, plus a 600p-a-share cash bonus, to Rio investors.

BHP’s share price rose rose 29p to £13.78 in London, where shares in Rio Tinto also increased, by 221p to £47.


However, Marius Kloppers, the BHP chief executive, is thought to be dampening expectation that he will offer more than the deal put to Rio in November. Industry insiders also revealed that there was almost no chance of an improved offer next week because the BHP board had not met to discuss the subject.

The Takeover Panel has given BHP until February 6 to make a formal bid or walk away from the deal for at least six months.

BHP is understood to be considering two strategies. The company could make a hostile bid by taking its formal offer at three-for-one directly to Rio shareholders.

The looming recession in the United States and Europe could harm mining companies, so Rio shareholders might find the BHP offer more tempting in a few months. A deal with BHP would give Rio’s shareholders a way to potentially limit their exposure to a recession by giving them a stake in a much larger company, with a projected market capitalisation of more than £150 billion.

Rio shareholders could also view BHP’s exposure to the oil industry as attractive at a time when oil prices remain high but metal prices may have peaked.

If BHP were to formalise the deal, it would be considered a hostile bid, which would complicate the process and remove some of the potential benefits.

The second strategy that BHP could employ is to walk away until later in the year. This would allow the company to retain cordial relations with its Anglo-Australian rival.

BHP declined to comment yesterday, while Tom Albanese, the chief executive of Rio, reiterated his belief that the three-for-one share offer undervalued his company.

Mr Albanese also presented a more bullish assessment of the mining sector’s prospects this year. He said that a recession in America would have a limited impact on China, which has driven demand for metals for the past five years.

He predicted that a 3 per cent drop in US GDP would knock less than 1 per cent off China’s continuing strong growth.

“Five years ago the Chinese economy was entirely dependent on the US economy but now it is nowhere near as reliant,” Mr Albanese said. “If there is a recession in the US it will not impact the Chinese economy as it would have in the past. That will continue to mean strong GDP growth in China and strong demand for metals.”