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— Deals —
When mining giant BHP Billiton plc first launched its takeover bid for Australian peer Rio Tinto plc in November 2007, the target's directors vowed to repel the hostile offer, and for 12 months they didn't let up. Last November BHP withdrew its bid, whose value had by then fallen from $194 billion, a record for a hostile approach, to $66 billion. It's a pyrrhic victory for Rio Tinto. Weighed down by about $40 billion of debt, unable to hit its own targets for selling assets, and with profits disappearing as commodity prices tumble, Rio Tinto in February went cap in hand to one of its biggest customers, Aluminum Corp. of China Ltd., or Chinalco, looking for funds. In the deal it struck with Chinalco, the Chinese steelmaker will take stakes in mines and buy debt that could raise its total equity holding in Rio to about 18%. The transaction will boost Rio Tinto's coffers by $19.5 billion, but it is far from popular with investors, analysts -- or BHP. At press time, BHP was approaching Rio shareholders with a counteroffer for some Rio assets in an effort to mitigate the full impact of the Chinalco sale.
"They [Rio Tinto's board] said no to BHP at the top of the cycle and yes to Chinalco at the bottom," said a London-based mining analyst who asked not to be named. "Worse, the new deal locks existing shareholders out. I don't doubt they are unhappy." Observers also question the wisdom of inviting a key customer, with an interest in keeping prices low, onto the Rio board. Chinalco will have two seats. Rio's board claimed BHP's offer -- 3.4 BHP shares for each Rio share -- undervalued the company. But even in the wake of the Chinese deal, Rio shares traded at just 1.5 times the value of BHP shares. To be sure, the role of Rio's board in persuading BHP to withdraw was secondary to that of the market and the regulators. BHP pulled its offer ahead of a shareholder vote as it weighed the impact of the collapse of the credit markets, a corresponding decline in commodity prices and the likelihood of regulator-enforced asset disposals. BHP chief executive Marius Kloppers at the time, "It was just not the right time to be taking on the level of debt that exists on the Rio Tinto balance sheet." Those debts were amassed in 2007, at the top of the mining cycle, when Rio paid $38.1 billion to acquire Canada's Alcan Inc. Rio's net debt-to-equity ratio is now about 100%, excluding the injection of the Chinese funds, compared with BHP's ratio of about 20%. Not all of the fault for the failed bid lies beyond BHP's control. Kloppers and his advisers, on whom about $450 million was spent, appear to have misjudged regulators' reservations about a deal and the likely disposals demanded. With asset values tumbling along with commodities and credit still tight, there could hardly have been a worse time to be a forced seller. Rio itself was already proving that point. It had hoped to sell $10 billion of assets by the end of 2008 as part of its takeover defense, but had offloaded just $4.6 billion by February. The decision to abandon the bid was a blow to Kloppers. The fresh-faced South African launched the offer just one month after taking the top job with the world's biggest mining company. The question now is whether the deal with the Chinese investor cements Kloppers' failure or gives him an opportunity to redeem himself. BHP could bid for a 30% stake in the Escondida copper mine in Chile. As a 57% owner of the mine, BHP has a pre-emptive right to buy Rio's stake. The purchase could be triggered by the Chinalco investment. With Chinalco about to come on board as a major shareholder, capable of blocking any further offers for Rio, it may be BHP's last chance to grab a significant piece of its rival. |
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