St. LOUIS (ResourceInvestor.com) -- BHP Billiton today detailed its $140 billion plan to take over Rio Tinto [NYSE:RTP; LSE:RIO; ASX:RIO], while Rio continued to resist, saying the offer is too low. Despite Rio's opposition, its shareholders apparently like the situation, sending its price to an all-time high of A$149.99 on the Australian Stock Exchange today.
BHP [NYSE:BHP; LSE:BLT; ASX:BHP] said in its offer that it intends to buy back $30 billion of stock within a year while offering $3.7 billion in savings seven years after the deal is completed. The bid, an all-share offer of three BHP shares for every one Rio share, gives a 28% premium on Rio's average share prices in the month prior to the bid and allows Rio a 41% interest in the new company.
BHP Chief Executive Marius Kloppers said he will take to the streets to convince Rio shareholders himself that the plan to form a $400 billion mining giant is beneficial to shareholders and the mining industry.
"This proposal will benefit both sets of shareholders, and we will be very patient to get that message out," Kloppers said during a conference call today.
Rio, however, said it was holding its own meetings with shareholders to explain why the offer significantly undervalues the company, according to Rio spokesman Nick Cobban. The company has not agreed to hold discussions with BHP.
"Our senior executives have already met with investors and will continue to do so," Cobban told media sources. "No meeting with BHP is planned as there is nothing new in what they said today. It has already been considered rejected by the board."
A Global Leader
London-based Rio produces iron ore, coal, copper, bauxite, alumina, aluminium, uranium and diamonds and holds operations in Australia, North America, South America, Asia, Europe and Africa. Its two biggest revenue makers in the year ended December 2006 were iron ore and copper, bringing in about $7 billion. Energy commodities and aluminium each produced about $4 billion.
BHP, based in Melbourne, has more than 100 operations worldwide and produces aluminium, base metals, iron ore, diamonds and specialty products, manganese, coal, petroleum and stainless steel materials. The company made $6.9 billion last year on stainless steel production. Petroleum, base metals and aluminium brought in about $6 billion each, while iron ore made $2.7 billion.
Source: BHP Billiton
The deal between two of the top three iron ore producers would create a global force in iron ore output. Rio produced 132.78 million tonnes of iron ore in the year ended December 2006, while BHP had an output of 98.197 million tonnes in the year ended July 2007. A combined Rio/BHP company would hold 27% of the world market for iron ore, matching the production of rival and world leader Companhia Vale do Rio Dolce [NYSE:RIO].
BHP noted in its conference call that China is industrializing quickly, causing increased demand for iron ore and stainless steel. The company also pointed out that India's GDP growth is increasing at a rate about 10 to 15 years behind China, meaning that demand will stay strong throughout the coming decades.
Source: BHP Billiton
In fact, Kloppers said BHP's iron ore sales to India in fiscal year 2007 were greater than its sales to China in 2002. Iron ore prices have tripled in the past five years thanks to Chinese demand.
BHP's bid for Rio suggests that it believes commodity prices can hold strong at their current prices - a risky bet to make in the seventh year of a bull market for commodities.
Antitrust Regulations
The concentration of nearly a third of the world's iron ore in one company is drawing the attention of antitrust regulators, especially in China, which buys about half the world's iron ore.
Kloppers, however, said BHP has been researching the deal for several years and "has done a lot of homework" in looking at the merger's potential effects on the market. The deal would need to get regulatory approvals around the world, which could take up to a year to finalize.
He said he had not "detected any hostility" during preliminary talks with Chinese steelmakers. He said BHP would explain to the Chinese government how the merged company could produce more iron ore at a cheaper coast than the two companies could produce separately because of synergies between Rio's and BHP's operations. The merger would create "economies of scale, sharing of infrastructure and removing duplication," Kloppers said.
But iron ore prices are likely to rise in 2008 long-term contracts, as BHP, Rio and CVRD continue negotiations with Chinese steelmakers about a pattern price agreement among global steel producers. Producers are looking for a 30% to 50% price increase in 2008's contracts, but some analysts expect it could be more if shipping prices rise. Spot iron ore prices are currently about $180 per metric tonne, while contracts are at about $80 per metric tonne.
Despite Kloppers' optimism that the deal would pass antitrust regulation, some industry insiders said the company may not easily pass with flying colours.
"The companies have a lot of overlaps not only in iron ore but also other products such as diamonds, alumina and uranium," Todd Miller, a competition lawyer at Baker & Miller, told a media source. "There is a whole list of products which requires an assessment of where the companies stand in terms of sales and operations. How a tie-up would affect the markets at issue will likely take quite a bit of time."
Some analysts said the merged company would likely have to sell off some assets in order to get the deal approved.
Rival Bids
No rival bids have been announced yet, but it is still early in the game.
Speculation that Chinese companies might make a bid was sparked by a British media report over the weekend that state-backed China Development Bank bought a 1% stake in Rio for $500 million last week, but a spokesman for the bank denied holding any interest in the company.
It is more probable that any Chinese company involvement would be in the form of financial backing of BHP.
According to another British newspaper report over the weekend, BHP may look to sell its petroleum division for approximately $40 billion to fund the $140 billion offer for Rio.
Kloppers, however, refuted that claim.
It would likely be a bad choice for BHP, which has a market cap of $211.19 billion, to sell off its oil and gas sectors now with oil prices hovering in the $90s. Its oil and gas fields make up about 12% of overall revenue.
But BHP will need to sweeten its bid by at least 5% to 8% to win over Rio. It is unclear whether Rio is avoiding a takeover altogether or waiting for a better offer, but a larger premium will be needed to sway the company, which paid a 65% premium when it acquired Alcan Inc. [NYSE:AL; TSX:AL] for $38 billion in July. Rumours of a cash offer have been floating around, but nothing has been confirmed yet.
Rio, with a market cap of $160.14 billion, dropped 7.86% on the New York Stock Exchange today, losing $37.59 to trade at $440.76. On the Australian Stock Exchange, however, the company added A$8.82 to close at A$139.72 after touching an all-time high of A$149.99 in afternoon trading.
BHP fell 5.10% today on NYSE, declining $3.87 to trade at $71.94. The miner lost 77 cents to close at A$41.70 on ASX today, a 1.81% loss.
Find the details of BHP's offer here. Below is the deal by the numbers:
