BHP Billiton ready to raise bid for Rio Tinto

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Sources close to Rio Tinto have said that the BHP offer of £81bn for the mining giant "isn't even in the ball-park", having flatly rejected the larger company's hostile bid on Friday.

However there was speculation over weekend about whether an offer somewhat closer to £70 per share might prove more acceptable to the Rio Tinto board – a 25 per cent premium to the shares' closing price on Friday. That means BHP would have to up its offer with a "cash sweetener" – on top of an improvement in the indicative three-BHP-for-one-Rio-Tinto-share offer already on the table.

BHP is believed to have lined up a $70bn funding package to help do just that, but there is still a gap between the two companies' aspirations. BHP would need to raise money anyway to refinance Rio's $43bn takeover of the Canadian aluminium giant Alcan.

BHP could raise additional funds through a sale of one of its businesses.

Top of the list of potential disposals is BHP Petroleum. BHP's advisers, Goldman Sachs and Citigroup, have flown to China to sound out potential bidders for the subsidiary, which could be worth morethan £20bn.

Meanwhile the China Development Bank, controlled by the government, has reportedly taken a direct stake in Rio Tinto, believed to be less than 1 per cent. However, such is the scale of the Chinese government's sovereign wealth funds and the strategic interest that Beijing has in such a crucial supplier of raw materials to the Chinese economy, a more active and role for the Chinese cannot be ruled out.

China's steel producers have registered their disquiet at the pricing power enjoyed by the Big Three suppliers – BHP, Rio Tinto and Companhia Vale do Rio Doce (CVRD) of Brazil.

China's foreign policy in states across Africa – most controversially Sudan – has often been geared to protecting long-term supplies of minerals for her burgeoning industries. Rio could call upon the Chinese, both as shareholders and major customers, to help defend its independence. A combined Rio/BHP would be the largest single supplier of China's iron ore, as well as enjoying a strong market share in copper, nickel and aluminium.

Rio is also thought to be exploring other lines of defence, such as mergers with CVRD, Anglo American or Xstrata, though a combination with CVRD would probably raise as many anti-trust complications as the putative BHP-Rio deal.