Worth a read if you have not done so,Best of luck to both...

Worth a read if you have not done so,
Best of luck to both Companies
should work out later


http://www.theaustralian.news.com.au/story/0,25197,23145965-5001641,00.html
Surprise move sends BHP back to the drawing board


Matthew Stevens | February 02, 2008

A MORE unlikely combination you can rarely have imagined. But there it is: Chinalco, China's aluminium flagship, has joined in post-Cold War alliance with Alcoa of America and plunged $16 billion to secure a seat at the resources' world's biggest takeover.

The first thing to say here is that this stunning and totally unexpected development appears to leave BHP Billiton's 3:1 proposal dead in the water.

The second is that the keenly timed, last-minute intervention has nothing to do with claims that China in particular is worried about BHP Billiton's attempt to create a super-major miner.

Rather it would seem the Sino-US alliance is setting itself up to secure some of the spoils should BHP Billiton eventually drag Rio Tinto to the merger altar.

Chinalco and Alcoa are downstream aluminum producers. In spending US$38 billion on Alcan, Rio Tinto not only engineered itself a place as the free world's biggest producer, it also defeated Alcoa's feisty Alain Belda who coveted the Canadian but couldn't, in the end, pay the price.

It would appear unlikely that Alcoa or Chinalco could acquire Rio Tinto. The successful management of a multinational, global resources house would seem to be a task beyond the capacity of either and both companies.

So what's the game here? Well, the nest guess is that Alcoa and Chinalco would be content to splice up the aluminium assets of Rio Tinto and/or BHP Billiton.

At one level then, the arrival of the cutely named Shining Prospect (the Chinalco-Alcoa investment vehicle) could prove a boon for BHP Billiton.

BHP Billiton's chief executive, Marius Kloppers, is no lover of downstream businesses generally and of aluminium particularly. He likes the long-term look of the alumina game, but believes that being long in the metal production game leaves him too exposed to the pricing of power.

It would not then be drawing too long a bow to suggest that Kloppers would contentedly deliver a aluminium assets of a MergeCo to the two new shareholders of Rio Tinto.

But that sort of decision is a long way away now. More immediately, Shining Prospect's stunning plunge would suggest that Kloppers attempt to low-ball Rio Tinto shareholders has back-fired and BHP Billiton's confidence that it was the only player in town ready to make a play for Rio Tinto was misplaced.

That, needless to say, is great news for Rio Tinto shareholders and reinforces phase two and three of the Rio Tinto defense strategy, which has been to focus on the value of the companies assets and the need for BHP Billiton to deliver a serious, game-winning bid when it goes formal before next Wednesday's UK Takeovers' panel deadline.

Rio Tinto's ownership is now a contested situation and that means BHP Billiton's value proposition, and the logic from which it is drawn, has to change rapidly.

It is crucial to understand here that Shining Prospect's 12 per cent stake is only a blocking stake while and BHP are at loggerheads over value.

If an accord is struck, then BHP Billiton and Rio Tinto can move forward with a scheme of arrangement which would leave the new investors with a valuable but no longer deeply strategic investment in the world's biggest miner. Remember, under a scheme, a merger could proceed with the approval of 50 per cent of shareholders owning 75 per cent of the target's shares.

Which all means that BHP Billiton's assault team will be gathering through the weekend to review any plans which were presented to the board on Thursday and Friday.

Until about 6pm last night, BHP Billiton's strategy had been set on the frequently espoused "calm and patient" path. The plan was to go long, to launch what is called a pre-conditional offer which would leave the ultimate size and structure of an offer open for possible another year. The pre-conditional offer was described by one insider as "a kind of 21st Century torture, the torture of the long game, it is living in a pressure cooker for a year."

Everything was so clear yesterday. Kloppers was to deliver a formal offer for Rio Tinto which most expected would be pitched at something marginally better than the 3:1 proposal which was delivered to the Rio Tinto board on November 1 and bluntly rejected sometime before the approach was made public on November 8.

It was to be a pre-conditional offer because that means the takeover timetables here and in the UK would be still until BHP Billiton had cleared a nominated round of international regulatory hurdles.

Given BHP Billiton delivers a formal offer, it is expected to be stuck in the maze of international anti-trust and foreign investment rules until at least October.

Only then does the takeover clock start ticking. At that point, for example, under British takeover rules, BHP Billiton would have another 81 days before it had to declare its bid unconditional. Up until then, of course, it could alter the terms and the price.

In effect then, Kloppers would not have to get deadly serious about pricing until the regulatory process is completed.

Which still raises the scary and tedious prospect that we could all still be talking about what price BHP Billiton might eventually pay for Rio Tinto this time next year. Now whether that places more stress on the bidder or the target is, like so much in this deal, hard to assess. Suffice it to say, living inside the takeover pressure cooker for another 12 months will provide fierce challenges on both sides of the siege.

But last night's events reinforces that the long-game strategy brings risk equally on both sides of a campaign.

Sure Rio Tinto's continued

independence is probably even more doubtful now and it probably still faces another year of tedium, disruption and diversion as Kloppers' strategy plays out.

But BHP Billiton faces its own pressures, a fact underscored by last night's unexpected twist. The fact is the longer you wait the greater the transaction risk.

The long-game says Kloppers and Argus trust that BHP Billiton's recent years of outperformance of Rio Tinto will continue. The target is sublimely confident it will not.

There are other issues too. Consider how fundamentally the markets have changed since November. Sure, each change (until last night) seemed to have worked in Kloppers favour. The deterioration of debt markets and the subsequent shakeout in equity markets have produced the sort of volatility which inspires short-termism in investment markets. And that is a positive boon for someone presenting a merger which brings with it the prospect of so much latent value.

When BHP Billiton chairman Don Argus called stumps on his two-day board meeting yesterday afternoon, he was probably feeling pretty chipper. The result looked terrific and the plan for Rio Tinto was all ready to roll.

By the time he gathers his fellow directors together again on Tuesday, the world will have changed again. BHP Billiton will still be the world's richest miner, but now it has a battle on its hands to deliver the decade-long quest to get his hands on Rio Tinto.
PL