The BHP Billiton bid for control of rival Rio Tinto has just been changed by the news that the $US90 billion offer from Brazilian mining giant, Vale, for Xstrata of Switzerland has collapsed.
That means Vale, which used to be called CVRD and is the world’s leading iron ore and nickel producer, could be a possible bidder for Rio: or Xstrata and Rio could combine, if Xstrata’s 34% shareholder, the secretive Glencore trading house of Zug in Switzerland, is amenable.
Xstrata shares plunged 12% in London at the opening last night, the biggest fall in five years. They then traded down 10%.
BHP presently has a 3.4 share for every Rio share on the table, which Rio is opposing, with CEO, Tom Albanese again arguing strongly against it at a media briefing in Melbourne yesterday.
But the stockmarket seems to be sending another signal, with the value of the BHP bid clearly exceeding Rio’s share price by probably the largest margin so far.
Rio shares closed at $118.27 yesterday, up $1.27. BHP shares added 90c to close at $35.31. That values Rio at $120.05. The market seems to be saying that there’s no chance of a counter offer from either Xstrata or Vale to the BHP bid.
Mr Albanese said yesterday that combining with its competitor wouldn’t help expansion as the company already has global breadth.
He told the media briefing that "There would be no new areas we could invest in as a consequence of being one company with BHP.
"Rio Tinto, unlike some of the other things we have seen in mergers and acquisitions globally, already has a size of global breadth," he said.
"We are comfortable running Rio as an independent company. What has been presented doesn’t come at all close to matching the Rio Tinto value proposition."
Rio rose as much as $2.48, or 2%, to a high of $119.48. The shares have dropped 11% this year and BHP has fallen 12%. The ASX 200 index has fallen 15%.
Vale wanted to pay around $US90 billion for Xstrata, but Rio and BHP would be out of its league.
The possibility of Rio and Xstrata merging can’t be dismissed outright, but might fail for the same reason: resistance to Xstrata’s biggest shareholder, Glencore getting control of the marketing of iron ore and other metals of the merged company.
That was a national issue in Brazil where Vale is still controlled by the national government, and would have continued to be controlled after the merger with Xstrata, if it had happened.
Vale confirmed it had offered stock and cash for 100 per cent of Xstrata but “given that an agreement was not reached, discussions between the parties have been discontinued,” the Rio de Janeiro-based iron ore producer said in a statement released to the media.
The two sides have been trying to hammer out a deal for months but were unable to come to terms. It is believed that Vale was unable to reach an agreement with commodities trading firm Glencore International of Zug in Switzerland, which controls around 34% of Xstrata.
Glencore had reportedly been seeking a long-term deal for the marketing rights to Xstrata’s metals production which includes copper, nickel, cobalt and coal.
Vale’s CEO was reported as saying the purchase was not a priority and that Vale was now vying other options.
He stressed that Vale would continue to diversify regardless of the outcome of the talks with Xstrata.
When Vale in February launched its bid, initially valued at $US76 billion, it was rejected by Xstrata. Vale sweetened the deal, raising its offer to about $US90 billion, according to media reports a fortnight ago in Brazil.
During the talks Vale reached a series of deals with customers in Japan, Korea and China to implement price rises of 65% to 71% for its iron ore exports from April 1. Xstrata said that its 2007 profit more than tripled to $US5.87 billion, while revenue rose 12% to $US28.54 billion.
Brokers in Brazil and London suggested that as Vale had not made a formal bid for Xstrata (they were only ‘talking’ in an indicative fashion) it still has the opportunity to launch a formal offer later in the year.
It can do so within the next six months, which could give it time to see the heat go out of copper and nickel prices. But offsetting this is a sharp rise in coking and steaming coal prices for the shipping year starting April 1.
They would offset lower metal prices and probably add to Xstrata’s price.
Vale has $US50 billion from banks including HSBC and Lehman Brothers to pay for the cash part of the offer but the debt and credit crisis has made raising that a bit more problematic.
The same applies to any deal for Rio, which would have to include far more cash to match the BHP offer on the table. Because of Glencore’s 34% holding, any offer from Xstrata would have difficulty: Vale and Xstrata would have to offer non voting shares (which Vale offered for Xstrata). They could not be listed in Australia.
