takeovers, page-9

From Mining News:

Takeover theatre good for iron ore plays
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Friday, November 09, 2007
Tim Treadgold

"ALL boats lift on a rising tide" – an old, but accurate saying which applied today as the entire iron ore sector was re-rated in the wake of BHP Billiton suggesting a merger with its fellow iron ore producer, Rio Tinto. Comment by Tim Treadgold.

The proposal, which lacks any detail on price or time, might yet turn out to be nothing but a suggestion which goes nowhere – as has happened in the past when the two mega-miners have jostled for seniority.

While most casual observers remember a previous attempt by BHP, when led by Brian Gilbertson, to acquire Rio Tinto, few go back far enough to remember Rio Tinto suggesting a similar deal in the mid-1990s – at a time when BHP was at its weakest in the wake of a series of failed expansion moves.

But, even without any terms, and with a formal rejection from Rio Tinto, the entire iron ore sector reacted positively to this latest piece of BHP takeover theatre.

Rio was the big winner, cementing its title as Australia's highest price stock with sales this morning up to $138.10, before easing as profit takers took some money off the table.

Other iron ore miners, developers and explorers shared to a greater or lesser extent the fresh interest in their sector.

Fortescue Metals Group, castigated less than 24 hours earlier by short-sighted shareholders and lobby groups, rebounded with a vengeance with its name added to the list of potential takeover targets.

In fact, the price movements of Rio and FMG were uncannily similar today. At midday, Rio was up 16.3% at $131.85, and FMG was up 14.3% at $50.89 – retreating like Rio from its opening burst of enthusiastic buying which took the stock up to $52.10.

Other stocks to move higher included Grange, up 11c (4.8%) to $2.41, FerrAus, up 4c (3.6%) to $1.14, Atlas, up 5c (2.2%) to $2.30, and Yilgarn, up 4c (3.4%) to $1.20.

BHP fell, as is often the situation in takeovers when investors buy the target and sell the bidder.

But, that raises a number of questions. Is BHP serious, and if so what are its terms? And would any bid actually succeed without a wholesale dismemberment of any merged entity by anti-monopoly regulators in Europe, and the United States?

Easily dismissed as niggling details in the heat of a speculative market, these are more than important questions when it comes to control of a large slice of the world aluminium, copper and iron ore markets.

They are also critical questions because without Rio Tinto agreeing to a friendly merger "of equals", an aggressive takeover bid would be bogged down for months, and possibly years, in courts around the world and in regulatory inquiries, with Rio Tinto tossing fuel on the fire.

It is because of the potential legal pitfalls that BHP politely asked "are you interested" – only to get a "not on your life" from Rio.

The next move must come from BHP. It can either mount an aggressive bid, which will cost much more than a friendly merger, or it can walk away.

Whatever happens there is little doubt that the investment world has been primed for significant resource sector upheaval.

The nickel market was stirred two weeks ago when Xstrata moved on Jubilee. The sight of BHP suggesting a merger with Rio can only accelerate merger activity with management teams keen to dictate events, rather than have them dictated.

Oxiana, for example, has been dithering around Zinifex for months. It must now move, or face a raid itself.

Alumina has been an off-on takeover target since Rio moved on Alcan. It is now a sitting duck, along with its US partner, Alcoa.

Iluka, if it didn't have so many internal issues, would be a natural takeover target, though most potential bidders will be inclined to wait and see how it resolves its cost problems.

Small nickels, especially Sally Malay, Western Areas and Mincor, will either eat, or be eaten – a logical step in the consolidation process which is likely to be a feature of the entire resources sector for the next 12 months.

In all, an excellent way to end 2007, and set the scene for merger mania in 2008.