BHP Billiton prepares hostile Rio bid

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The Independent Online

BHP Billiton, the Anglo-Australian mining company, is in the final stages of preparing a £65bn hostile bid for its rival Rio Tinto, after securing an agreement from seven of the world's largest banks to lend it the additional $70bn (£36bn) it needs to finance the deal.

Although Citigroup and Merrill Lynch had originally agreed to back the deal, both banks were hit with heavy losses at the hands of the sub-prime mortgage crisis during the second half of last year, and were forced to take a step back from the deal. As a result, Citigroup is believed to have been joined by Santander, BNP Paribas, Barclays, UBS, Goldman Sachs and HSBC – which together will provide BHP with the funds it needs.

BHP is expected to launch its hostile bid within the next fortnight, before the Takeover Panel's put up or shut up deadline of 6 February.

The Anglo-Australian company first revealed its interest in Rio Tinto in November, making an informal three-for-one all-share offer, which was immediately knocked back by the Rio board.

It is thought that any hostile bid will at least 20 per cent higher, and may contain a cash element. Last week, analysts predicted that the offer may have to be as high as 3.8 BHP shares for each Rio share, in addition to a 30 per cent takeover premium. Rio's shares have consistently traded at around £10 a share above the implied offer price of £42 a share from BHP

BHP needed to raise the $70bn in order to refinance a $40bn loan that Rio took out to fund its acquisition of Alcan, the Canadian mining group, last summer. The loan contract contains a clause stipulating that the facility must be refinanced within 45 days of any change in the company's ownership.

The remaining $30bn would then be available to fund the cash part of any new offer for Rio, or could be used to carry out a share buy-back once the deal had completed.

If BHP does not make a bid before 6 February, Takeover Panel rules state it will not be able to re-approach Rio for another six months.

Last week, Rio burnished its defence against the unwanted takeover bid by BHP, as it revealed record-breaking production numbers across a range of commodities. Its iron ore production, which was up 9 per cent on 2006 to 145 million tons, particularly impressed investors. Prices of iron ore are expected to rocket this year – by as much as 70 per cent, according to analysts from Credit Suisse – due to a global supply shortage.

Rio's production of iron ore has risen at just under 15 per cent a year over the last eight years, compared with just 6.8 per cent at BHP. Rio's iron divisions is one of the main strategic attractions for BHP.

BHP is continuing to expand its own iron ore operations at an accelerating pace, however. At the weekend, it told journalists in western Australia that profits from its iron ore division had risen by 13 per cent last year. Earnings before interest and tax rose to $27 per metric ton, up from $24 a ton a year earlier.

Persuading investors to back its hostile bid for Rio will only be the first step in a long process to complete an acquisition of the company. The group will also require a number of regulatory approvals, which are expected to take as long as a year to acquire.

If the merger is successful, the deal will be the second largest takeover in history, coming second only to AOL's $163bn acquisition of Time Warner in 2001.