KEY POINTS:
The board of Rio Tinto rejected a sweetened US$147.4 billion ($187 billion) bid from BHP Billiton yesterday, setting the stage for a drawn-out takeover battle as BHP pledged to push ahead with its hostile offer by taking it direct to its rival's shareholders.
After a board meeting this week in London to consider the improved terms tabled by its suitor the day before, Rio's chairman Paul Skinner said 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 ($134) 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. The Chinese company, Rio's largest shareholder, noted BHP's improved terms but implied it would not be inclined to accept.
Chinalco says it has no intention to make 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.
Damien Hackett, an analyst at Canaccord Adams, 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 that it can extract US$3.7 billion in synergies over seven years by combining with Rio.
Hackett said the Chinese government would be able to save US$6.8 billion from the first year if it were to take over Rio simply by selling its annual output of 200 million tonnes of iron ore at US$26 per tonne, the current extraction cost for Rio, to itself.
- Independent
Move and countermove - the Rio takeover bid blow by blow
November 8, 2007: BHP proposes to buy Rio through a three-for-one share swap. Rio rejects the proposal as vastly undervaluing the firm and its prospects.
November 12: BHP gives details of its takeover plan, arguing the marriage would result in US$3.7 billion in synergies in seven years. Rio says the bid remains "well out of the ballpark".
November 20: Eurofer, the lobby group for the European steel industry, says it will ask the EC to block the proposed merger.
November 26: Rio unveils plans to double iron ore output by 2018, raise dividend and generate at least US$15 billion in asset sales.
November 27: Seven banks pledge to raise US$70 billion of financing for BHP's planned bid.
December 7: Rio says the firm had been approached with other offers, but is sticking with its independent growth strategy.
December 11: Rio asks Britain's Takeover Panel to set a deadline under its "put up or shut up" rule under which BHP has to formalise its bid or walk away.
December 21: Panel imposes a deadline of February 6 for BHP to make a formal bid for Rio or abandon bid for six months.
February 1, 2008: Aluminium Corp of China (Chinalco) and Alcoa buy a 9 per cent stake in Rio worth US$14 billion.
February 6: BHP announces formal bid, sweetening offer to 3.4 shares for each Rio share and setting 50 per cent acceptance level.
