Up one day, down the next, there’s nothing like the craziness of a stockmarket showing signs of overheating.
And so it was this week with an investment analyst’s report which speculated that BHP Billiton could afford its not so small rival, Rio Tinto Group. Off went the Rio shares surging towards $100, only to fall short by around 31c and in the process dragging the market higher.
Rio denied it (forced to by an ASX query) and down went the shares and the market yesterday: in the process Rio failed by those few cents to become our first $100 a share company. The overall market ended up a touch higher by the close
Rio jumped more than six per cent Wednesday and fell more than four per cent yesterday, so there was a small gain (so far) in the two day wonder.
And funnily enough, the chartists had Rio heading towards $100 a share anyway: thanks to the rumours it almost got there in a day instead of sometime in the next couple of months.
As one said yesterday when asked for a reason “sheep”.
In the wake of the report from Citibank, the rumours swirled: the two companies were talking, BHP CEO, Chip Goodyear had dinner with his new counterpart at RIO, Tom Albanese, who has a reputation for being a deal maker.
Some even thought it was a way of putting two companies together with the bonus of getting a replacement for the departing Goodyear in the RIO CEO.
The price of the putative deal started at $100, rose to $110, then to $120 and someone was suggesting $30 a share. As Rio Tinto Ltd owns 37.5 per cent of the dual listed company it will have to be a friendly deal, not hostile.
That’s why there was talk of BHP snuggling up to Rio, just as those private equity buyout groups attempt to do the same thing with their ‘hugs’ of the likes of Coles and Qantas.
Then there was the story that two hedge funds had some sort of complex option deal with RIO shares involved a price of $100 a share with an expiry date this week. They missed out, but we’ve still a few hours of trading to go in the week, and then there’s next week, and the week after.
The failure of the $11.1 billion bid for Qantas meant hedge funds had to have somewhere to go and invest as they have unwound positions this week; the Rio story fell into their laps and off went the market. Incredible.
Perpetual’s acceptance of the Rinker offer meant it had close to $1.8 billion to start re-investing; the rumour mill ground on.
Helping fuel the sentiment was the real fact of Alcoa’s $A33 billion bid for its rival, Alcan this week gave some underpinning to the idea that big miners could nibble and then grab for each other. The biggest mining merger so far was March’s Freeport McMoRan’s $US26 billion snatch of Phelps Dodge.
No one wondered if Rio or BHP Billiton might be more interested in Alcan’s aluminium and associated assets, especially BHP which has even been touted by analysts as a possible bidder for Alcoa.
Obviously all things are possible and every combination is feasible when we have so much liquidity on the loose, looking for a profitable home.
A merger of Rio and BHP would create the world’s largest copper producer and iron-ore miner and a company with a combined market value of more than $US250 billion. Citigroup claimed that Anglo American and Xstrata were other potential bidders.
Citigroup’s report said the competition problems could be sorted out and the main barrier for potential bidders and any buyout groups was “the perceived loss of Australian control of key iron ore assets.”
After Qantas and all the controversy that raised, you’d think analysts might stop to think for a moment or two before committing fingers to keyboard.
What the analyst and others haven’t even mentioned is the world’s biggest investor at the moment: China with its fleet of State-owned or partly-owned resource and trading companies, all having access to the world’s biggest investment fund, the $US1.2 trillion or more in China’s official reserves.
China is in the process of setting up a new investment arm to handle some of those reserves and invest them differently to the way much is held in US dollar assets (and euros and yen). What a way to start!
If it is feasible to speculate on BHP taking a look at Rio, why not China: it’s Rio’s biggest customer (and BHP) and the payoff would be access and controlling interests and significant stakes in coal, iron ore, copper and industrial minerals, not to mention uranium.
Of course there would be security and foreign control problems in Australia and the US (probably insurmountable) but the cash wouldn’t be a problem to China.
It’s just an idea but wouldn’t that terrify and electrify the markets. Even the hedge funds and private buyout huggers would be shocked and awed.
And even if Rio and BHP merged and got through the regulators here, in the US and Europe, what would the customers in China, Japan, South Korea, Taiwan, India and other countries say? Move some purchases to the Brazilian giant, CVRD for a bit of insurance?
And you could hear Twiggy Forrest and his Fortescue Metals Group cheering on the Rio speculation: all he wants is nervy Asian customers looking for a bit of insurance with his iron ore operation in WA.
