Hope springs eternal amongst Rio Tinto Group's battered and abused shareholders. Rumors that BHP Billiton plc, the world's biggest miner, could be pondering a new bid for its smaller rival briefly fired up Rio's stock Monday after a British paper claimed that BHP shareholders had been sounded out by management over the possibility of strategic acquisitions, including a new approach for Rio. The Sunday Telegraph
claimed that there had been "informal dialogue" between BHP and Rio's advisors.
A deal could happen. The combination makes huge amounts of strategic sense, as it did last year, when Rio's board rejected BHP's offer of
3.4 shares for each Rio share. Rio chairman-elect Jan du Plessis could embrace BHP without losing face, given that he was not part of the board that rejected the initial deal. And any deal that offered Rio's existing shareholders an alternative to the exclusion of Rio's plans to offload $195 billion of assets and shares to Aluminum Corp.
of China, or Chinalco, is likely to win shareholder support.
Yet it is worth remembering that BHP's offer for Rio wasn't rejected; BHP pulled it. The mining company cited collapsing commodity prices and Rio's $38 billion in debt, which looked increasingly onerous given the difficulties of refinancing, as the key stumbling blocks. None of that has changed. Neither has the likelihood that regulators in Australia would demand disposals of key assets as part of a full merger.
Rather than place a new bid for all of Rio, BHP is more likely to be planning a multi-billion dollar cherry pick of Rio assets. The door to that scenario was opened last week when Rio said it could sell assets and stock under a so-called "Plan B" if regulators or shareholders blocked its Chinalco sale. That looks a distinct possibility.
Australia's Treasury last week vetoed the A$2.6 billion ($1.8
billion) sale of Oz Minerals Ltd. to China Minmetals Corp. on somewhat spurious national security grounds. The decision came amid an Australian public and political backlash over the potential sales of $22 billion of Australian mining assets to Chinese-state controlled companies.
If BHP were to pay about $10 billion in cash for Rio assets, including iron ore and copper mines, by either buying in as a minority holder or taking outright control, it would be enough to solve the targets immediate debt problems. It would also put Rio in a far stronger position to sell new shares or debt to raise more cash. And it would circumvent a regulatory prohibition on any new bid for Rio ahead of November, which was put in place by British regulators when BHP abandoned its last offer for Rio.
It might not be the quick fix that Rio's shareholders are hoping for.
But they might take consolation in seeing it as a step in the direction of a merger, which could be completed once credit and commodity markets stabilize.
- Paul Whitfield
See story from the Sunday Telegraph
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