bhp and rio

Rio Tinto may yet befriend BHP
AdvertisementEmail Print Normal font Large font AdvertisementBarry FitzGerald
November 15, 2008

TO SOME in the market it was the surest sign yet that Rio Tinto was about to wave the white flag and endorse BHP Billiton's $90 billion scrip takeover bid.

But to others it simply reflected a typically prudent move by Rio in light of the uncertainty caused by the crash in commodity prices in response to the global financial crisis.

Either way, Rio's surprise cancellation of investor briefings on November 25 (Sydney) and November 27 (London) was to prompt speculation surrounding the immediate future of BHP's 3.4-for-one conditional scrip offer.

The official reason for the cancellation of the briefings was the uncertainty in financial, commodity and equity markets.

"We will review the timing again early in the new year when we can better assess the impact of recent market turbulence on our short/medium-term plans," a spokeswoman said.

Rio's departing chairman, Paul Skinner, is still expected to make his way to Australia from Rio's London head office to honour speaking engagements.

But Rio's next response to the meltdown in commodity demand and prices will be held over until another time. Rio has led the local the industry by announcing a 10% cut in iron ore production.

That is in contrast to the attitude of its suitor, BHP. It has yet to announce cutbacks although its sale of cut-price iron ore to struggling Chinese customers amounts to the same thing.

The market is waiting on Rio to concede the need for aluminium production cutbacks. BHP was the first on that score, but only because of the impact of power shortages on its southern African smelters.

BHP shares closed $1.40, or 5.6%, higher at $26.40. Rio shares closed $3, or 4.3%, higher at $72, the equivalent of 2.72 BHP shares. The continuing market discount in Rio to the implied value of the BHP bid is due mainly to continuing uncertainty about the offer being cleared by the European Union. The EU has flagged it has concerns with the proposed takeover.

If any remedies are being sought by the EU and they are not to BHP's liking, BHP could walk. It is for that reason, and Rio's continuing heavy discount to the proposed BHP offer, that speculation continues that Rio could ask BHP to make the offer a friendly one.

The EU is due to announce its decision by January 15.

The reporter owns BHP shares