Twice rejected by the board of Rio Tinto, BHP Billiton has decided to take its proposed $153bn (£74bn) takeover directly to the shareholders of its rival miner.
BHP, one of the largest mining groups in the world, launched an investor lobbying campaign yesterday by revealing new details of the structure of the mega-deal and dangling a $30bn sweetener in the form of a share buyback programme if the deal comes to fruition.
The bid to create the mining sector's first "super-major", unveiled last week, has been dismissed by Rio as "derisory". But the BHP chief executive, Marius Kloppers, said yesterday that his priority was to engage in friendly talks with the board of Rio. "Our absolute first priority is to sit across the table from Rio," he said. "I have every faith that as we tell our story the compelling nature of this transaction will become ever more evident." He hopes that by convincing Rio shareholders of the deal, they will in turn pressure the Rio board to come to the table. Failing this, Mr Kloppers did not rule out going hostile.
Analysts have said that BHP will have to dig much deeper to win approval. Rio's shares closed yesterday above the share price implied by BHP's initial offer, amid the expectation of an offer from a rival consortium or that BHP will be ultimately forced to sweeten the pot. Tim Gerrard, an analyst with Austock in Australia, said that BHP's offer is cheap, asking shareholders to accept that all of Rio's assets around the globe are worth roughly the same as its one massive iron ore operation in Pilbara in Western Australia – estimated at $77bn. "BHP Billiton's offer of [about] $150bn for the whole company is a weak one," he said.
The 3-for-1 share swap that has been tabled by BHP implies a premium of 28 per cent over Rios closing share price before news of the deal broke. Critics point to the 55 per cent premium Rio paid to take over the aluminium giant Alcan this year as a more appropriate level. Mr Kloppers said such comparisons were spurious because the Alcan transaction and other recent mining deals were "cash-based auctions of smaller companies. This is clearly not," he said. "Not all aspects have been digested by the market."
Mr Kloppers expects to be able to wring $1.7bn in synergies out of the combined group by the third year of the deal, and to increase earnings before expenses by up to $2bn by the seventh year. The latter would come from accelerating production and the improved response to demand that would result from the combined rail, port, and seaborne transport infrastructure of the companies.
A Rio spokesman said the details of the offer were "nothing new" and that it "significantly undervalues" the company. If the deal were to go through, Rio shareholders would end up holding 41 per cent of the shares of the combined entity, with the remainder in BHP investor hands.
One of the major questions looming over any deal would be the likelihood that it would pass muster with anti-trust regulators, especially in China, the largest customer of both companies for iron ore, the basic ingredient for steel. "We have done a lot of homework, and we feel we have a very strong case," said Mr Kloppers. "It can be delivered without compromising the basic integrity of the deal." BHP expects that the regulatory process would take up to a year.
Other questions have been raised about the deliverability of what would be one of the world's largest-ever transactions just over a month after Mr Kloppers took the chief executive job. He said: "I've probably integrated more businesses than any other executive in the industry. And what I see before me is a deal with absolutely unparalleled value that we can unlock."Reuse content