The board of Rio Tinto rejected a sweetened £75bn bid from BHP Billiton yesterday, setting the stage for a drawn-out take-over battle as BHP pledged to push ahead with its hostile offer by taking it direct to its rival's shareholders.
After a board meeting called in London to consider the improved terms tabled by its suitor the day before, Rio's chairman Paul Skinner said yesterday that the improved 3.4-for-one share offer, "still fails to recognise the underlying value of Rio Tinto's quality assets and prospects". He added: "Our plans are unchanged, and will remain so unless a proposal is made that fully reflects the value of Rio Tinto."
The new deal, an improvement on BHP's previous three-for-one offer, would give Rio shareholders a 44 per cent stake in the combined entity. Analysts said that BHP would be hard-pressed to give up more shares to Rio investors as doing so would approach a merger of equals. Any further increases would probably have to come via a cash sweetener.
Yet the world's largest mining company put a brave face on the rejection, arguing that Rio's refusal did nothing to change its strategy under which it hopes to sway at least half of Rio's shareholders to tender their shares to the offer – a precondition of the bid. But with BHP facing a regulatory approval process that could last a year, the market will shift its focus more squarely to Chinalco, China's state-owned aluminium group.
The offer of £54.29 per share implied by BHP's bid falls well short of the £60 per share that Chinalco paid with partner Alcoa last week in a share raid that gave them 9 per cent of the company. Now Rio's largest shareholder, the Chinese company last night noted BHP's improved terms but seemed to imply that it would not be inclined to accept.
Chinalco said: "As shareholders in Rio Tinto, we believe any offer should reflect the fundamental value of the company." When it announced its shock share raid last week, Chinalco said it had no intention of making a full bid for Rio. But under City takeover rules, the launching of a formal offer by BHP now frees Chinalco to do the same if it wishes.
The labyrinthine process that now lies before BHP – a global shareholder lobbying campaign and something of the order of 100 regulatory submissions to various bodies in Europe, America, Asia and Australia – makes predicting the outcome of the saga near impossible.
However, as BHP had not gone for a knockout price now, some analysts said it had boxed itself into a losing position. "They'll be seen off. If they go higher, there's not a lot of value in it for their shareholders," said Damien Hackett, an analyst at Canaccord Adams. He said that Chinalco, which has the backing of the deep-pocketed China Development Bank, could afford to launch an all-cash offer for Rio at a far higher price than BHP could manage.
BHP has estimated it can extract $3.7bn in synergies over seven years by combining with Rio. Mr Hackett said the Chinese government would be able to save $6.8bn from the first year if it were to take over Rio simply by selling to itself Rio's annual output of 200 million tonnes of iron ore at $26 per tonne, the current extraction cost for Rio. At the moment, the Chinese are buying most of the ore needed to fuel their construction boom at $60 per tonne. The annual $6.8bn in savings could be enough to convince the Chinese to pay a hefty premium for Rio, though few expect the Australian government would easily sign off on the sale of a huge chunk of its natural resources to an entity controlled by the Chinese government.Reuse content