BHP Billiton has been rejected in its attempt to snuggle up to rival Rio Tinto Group and pounce to produce the world's biggest mining group.
If the deal is ever done it would be the biggest takeover in history and would be worth more than $A200 billion and it would annual revenues of more than $US55 billion, and earnings close to $US20 billion a year.
A merged BHP-Rio would be worth at least $US400 billion, if Rio's objections are to be satisfied.
And competition concerns as with CVRD of Brazil, BHP and Rio control 80% of the world seaborne iron ore trade, which is the fastest growing party of the industry.
The purchase of Rio, which has a market value of $US159 billion, would create a company that controls more than a third of the iron-ore market, supplies the most energy coal and copper, and owns mines and oilfields in six continents. Rio shares jumped 21% in London trading.
BHP told the London Stock Exchange overnight that the proposed takeover – which would be one of the largest in business history – could create a $US350 billion-plus mining giant, but that the Rio Tinto board had rejected it.
In a statement in London last night, BHP said it "recently wrote to the board of Rio Tinto outlining a proposal in relation to a potential combination with Rio Tinto on terms incorporating a premium.
Near the close of trading in the Australian market yesterday, there was heightened speculation BHP was about to make a bid for its rival, offering three of its shares for every one of its rival. Last night Rio Tinto confirmed the rumoured offer price, adding that BHP's proposed bid "significantly undervalues Rio Tinto and its prospects". BHP shares closed at $43.24 in Australia yesterday and Rio at $113.40.
If the London moves are any guide, Rio shares will leap today towards $130 a share, BHP shares (which have a high of $47.70), will probably come under pressure early on but will rise because investors here would see the logic. The fact that BHP has offered its shares means it can't see anyway of raising enough cash, especially in the current tight market conditions.
But it might have to find some to top up and feed the hedge funds and China might be the only place for it. The two companies have similar dual-listed structures in Australia and London and what would be created would be one of the top 10 companies in the world.
It would include significant holdings in copper (Escondida in Chile would be a real prize, buying Rio would give BHP almost total control), coal of all types, lead, zinc, industrial minerals, aluminium, bauxite and alumina, iron ore, diamonds, and smaller holdings in oil and gas (BHP should never has sold down its Woodside holding).
But the deal has to run significant hurdles: firstly the Rio board will have to be convinced, secondly its shareholders will have to be convinced and thirdly all regulatory approvals will be needed.
Competition regulators in Australia, the US and Europe will be pivotal in any approval: the combined company's domination of iron ore from Australia would be a major barrier.
Not even the emergence of a flurry of smaller rivals in Australia led by Fortescue Metals, would be enough to get the deal over the line.
And the Chinese Government and steel industry (and Japan's for that matter) would have to be won over as they would all see an aggressive BHP linking with the more conservative and buyer friendly Rio.
BHP has been trying to change the price negotiating system with China (and other buyers as a follow on) away from the yearly ritual of negotiations towards a price system based on an index and open market. Rio has said it is happy to stay with the present system.
One way to do that would be to link with a Chinese group which would tap the country's $US200 billion wealth fund to provide a cash alternative to be offered as part of a revamped bid.
Chinese companies could be sold stakes in various assets in exchange for the cash.
But that has drawbacks as all mines in BHP and Rio's portfolio, especially in iron ore, have Japanese (and a couple of Chinese and Korean groups) have mostly Japanese minority interests in the form of steel companies or trading houses like Mitsubishi. Mitsubishi is a 50% partner in BHP's Queensland coking coal assets.
They have veto rights and have in the past exercised and rejected attempts by BHP and Rio to introduce other shareholders, or in takeovers, such as North Broken Hill where Rio had to do a special deal to get them onside.
Speculation of a possible BHP-Rio Tinto tie-up increased in recent days after Rio finalised its $US38.1billion purchase of Canadian aluminium producer Alcan, which made Rio Tinto the world's largest aluminium producer.
The Rio board said it had "unanimously rejected the proposal as not being in the best interests of shareholders", and would continue to "focus on the implementation of its well-articulated strategy, including integrating Alcan operations".
Given BHP is already the world's largest mining company, ahead of Brazil's CVRD, a merger with Rio, the third-ranked miner, would solidify its position.
Combined, BHP and Rio Tinto would be the world's largest iron ore and aluminium producer.
Besides iron ore and Escondida, the key asset in both companies for the future is Olympic Dam, Australia's largest underground mine acquired as part of the $9.2 billion purchase of WMC Resources in 2005. BHP hasn't made a major acquisition since. The mine's resources include 79 million ounces of gold (the fifth-largest deposit in the world), the largest uranium deposit in the world and huge copper reserves.
If this deal is done, there will be nothing else for BP-Rio to do and in a couple of years time investors will be asking, 'what's next'?
Manag
