Rio Tinto soars after rejecting $142bn BHP approach

BHP Billiton is expected to return with an improved offer for Rio Tinto after the UK-based mining giant rejected a $142bn all-share approach that would create one of the largest companies in the world.

BHP, which has its headquarters in Melbourne, revealed yesterday it had approached the Rio board in the past two weeks outlining a "potential combination with Rio Tinto on terms incorporating a premium".

Rumours of the "mega merger" between the world's first and third largest mining groups have repeatedly circulated the market this year and BHP confirmed yesterday in a regulatory statement that it had made an indicative bid.

Shares in Rio Tinto, which is listed in London and Australia, leapt 21 per cent to a record 5,296p, valuing the company at $144bn last night. BHP shares fell 5.6 per cent to 1,656p.

Based on the companies' closing price before the bid was announced, the merged group would be the seventh largest in the world by market capitalisation, according to Thomson Financial. It would be the largest producer of copper, coking coal and aluminium, and would overtake Brazil's Companhia Vale do Rio Doce in iron ore production.

Rio said: "The boards of Rio Tinto have given the proposal careful consideration and concluded that it significantly undervalues Rio Tinto and its prospects. Accordingly, the boards have unanimously rejected the proposal as not being in the best interests of shareholders."

Sources close to the target said the current bid provided no basis for negotiation, with a premium of 20 per cent to Rio's closing share price the previous night. The premium for Rio's $42bn takeover of Alcan, the previous largest acquisition in the sector, was about 56 per cent.

BHP revealed its intention to return to the negotiating table, saying it was pushing for "an opportunity to meet and discuss its proposal with Rio Tinto".

In its rejection, Rio detailed the terms of the all-share offer. Under the proposal, each Rio share would be exchanged for three BHP shares, valuing the deal at about $142bn last night. It would be the second largest takeover on record behind Vodafone's acquisition of Mannesmann for $172.1bn in 2000.

One mining banker said: "BHP will sweeten its deal, as this offer looks on the cheap side. Some have speculated that Rio could be worth up to $200bn. BHP's bid has been rumoured for ages and has taken this long, so they won't just walk away. They know that no one accepts a first offer."

It is a bold move by BHP's new chief executive, Marius Kloppers, who only took up the role at the beginning of last month. The company confirmed in May that Mr Kloppers would replace Chip Goodyear when he stepped down on 30 September. He has been at the group and its predecessor companies for the past 14 years, most recently as group president of the non-ferrous metals division.

Rio's chief executive, Tom Albanese, is a veteran in comparison, taking over on 1 May. Two months later, he too had launched a transformational deal when Rio outmanoeuvred Alcoa to buy the Canadian-based Alcan.

Talk of a tie-up between the two companies gathered weight in May this year, when Rio's share price shot up 11 per cent on rumours of a BHP bid. Both companies denied the talk at the time, but the rumours have returned repeatedly. Some analysts have expressed concerns over competition issues in such a deal, especially over the iron ore market, but BHP moved to allay fears. The group said it has examined the regulatory issues "and other practicalities of a combination".

BHP was heavily linked with a bid for Rio in May, after rumours swept the Australian market of a potential $100bn deal. The talk sent Rio's shares soaring 11 per cent. Since then the rumour has reappeared almost once a month.

The two companies had previously tried to merge their iron ore businesses. Rio held talks with BHP, before it merged with Billiton in a $14.5bn deal in 2001, but the negotiations collapsed as Rio claimed BHP had overvalued its operations.

Yesterday, Rio announced it was considering selling all or part of Rio Tinto Energy America. The division is the second largest US coal producer by tonnage.