Amid a flurry of global takeovers, speculation swept the Australian market today that BHP was readying a hostile bid for Rio Tinto, traders and analysts said.
Rumour had it the bid came after Rio had rebuffed a friendly offer of A$100-A$110 per share, a premium of up to 23% from yesterday’s close, they said. Rio at first kept mum but after the close of Australian trading doused speculation of a BHP tie-up.
"Rio Tinto is not aware of any takeover approach from BHP Billiton," Rio told the Australian Stock Exchange. But shares in Rio, which has a market capitalisation of about $90bn at its current price, later traded up 7% in London, while mining stocks across Europe rose 2%.
The shares had earlier jumped as much as 11,1% to a record A$99,69, their biggest daily gain since 1987. They closed 6,5% higher at A$95,50 in Australia. Some 8,6-million Rio Tinto shares had changed hands by the close, more than double the monthly average. "There was screaming everywhere and people were trading like nutters," said Ric Klusman, an institutional dealer at Aequs Securities in Sydney.
BHP rose to a record high of A$32,58, up 4,5% before easing to A$31,93 by the close. It traded up 2% in London. The cost to insure BHP’s dollar debt against default jumped on the report, with its five-year credit default swap spread swelling by 5 basis points to 17 basis points.
BHP spokeswoman Emma Meada declined to comment.
Leadership of both companies is in flux, fuelling the speculation of a link-up. BHP’s US CE, Chip Goodyear, who helped transform the company into the world’s biggest mining house, is leaving by year end. A successor has not been named.
Rio Tinto CEO Tom Albanese, a New Jersey-born geologist, has been in the job less two weeks and is regarded as having an appetite for growth. Citigroup said in a note to clients this week that Rio Tinto’s hefty cash flow made it an attractive takeover target for private equity firms, although BHP would be a more likely bidder given synergies that exist between the two companies, particularly in iron ore and copper.
BHP and Rio Tinto have a combined market value of about $234bn - about twice the size of New Zealand’s economy.
On Monday, US-based aluminium giant Alcoa said it would make a hostile bid for Canada’s Alcan for about $27bn, after talks between the two aluminium producers failed to reach a friendly deal.
BHP Billiton was assembled through the merger of Australia’s Broken Hill and Billiton of SA in 2001. Since that time, the company has made only one major purchase, buying Australian nickel, copper and uranium miner WMC for about $6bn, despite widespread consolidation of the sector. It has chosen instead to reward shareholders with billions of dollars in share buybacks.
While BHP and Rio compete head-to-head in iron ore, aluminium and its derivative products, copper and uranium, the pair are also partners in the giant Escondida copper mine in Chile. A marriage of the companies would assemble a force in iron ore mining - each digs millions of tonnes of ore annually from neighbouring lodes in far western Australia - to rival the top producer CVRD of Brazil. In copper mining, the company would rival Codelco of Chile, which mines about 1,3-million tonnes of copper in concentrate per year, though the combined entity would lag the Chilean state-owned producer in refined output. In iron ore, BHP-Rio would challenge CVRD.
"This will raise the degree of centralisation in the world copper market. Their controls over (global) resources will also rise," said Changhua Yang, copper analyst for state-owned research group, Antaike.
The company would account for 6,6% of world primary aluminium production and 9,75% of alumina output. Rio Tinto, itself a product of a merger of RTZ of Britain and CRA of Australia in the 1990s, also mines iron ore in Canada, where BHP’s activities are largely limited to diamond mining.
Both companies have profited handsomely from a prolonged boom in mineral commodity prices, leading an industry-wide resurgence in mining and metal making after years in the investment backwaters.
Aluminium prices are up about 10% so far this year, copper 46% and nickel 58%. BHP Billiton made $10,45bn in net profit last year and this year could earn $13,2bn, according to ABN AMRO.
Rio Tinto showed a 2006 profit of $7,8bn. Macquarie Bank sees 2007 profits about $7,4bn, giving it a trading multiple of about 12 times earnings, compared with BHP at 11 times and Xstrata at 8,6 times.
The Australian government, which at times has displayed nationalistic tendencies in corporate takeovers when foreign ownership was deemed outside the country’s best interest, would not likely interfere in a bid by BHP, according to analysts. Both Rio and BHP are dual listed on the Australian and London bourses.
