Mining giant BHP originally proposed a 3-for-1 share swap, which would have valued Rio at about $130bn, but Rio immediately rejected the offer as being too low. Now BHP has come back (just hours before its ‘put up or shut up’ deadline) proposing to pay 3.4 of its own shares for every one of Rio’s. That would give the deal a value of about $147bn, making it the second biggest takeover deal of all time (behind Vodafone’s acquisition of Mannesmann).
The hostile bid is pitched at about the same level as Rio’s current share price, but as BHP chief executive Marius Kloppers pointed out, it was 45% above the share price before this whole saga became public. He wants to create a mining giant valued at more than $300bn, of which Rio’s shareholders would own just under half. And he’s even sweetened the pill for his own shareholders by promising to do a hefty $30bn share buy-back if the deal goes through.
However, as of last week, there’s a new elephant in the room. The imaginatively-named Chinese aluminium company Chinalco, with a little help from US group Alcoa, snapped up a 12% stake at $60 per share on Friday. That’s about $5 higher than BHP’s revised bid – and apparently it’s seeking approval to increase this stake even further, to almost 20% (that’s why BHP said yesterday the deal would become unconditional if just 50% of Rio shareholders accept it).
Nobody seems exactly sure what the Chinese group’s intentions are, or even whether it’s actually planning a counter-bid for Rio – it said last week it reserved the right to do so in the event of a third party offer. But it’s definitely got a lot to lose: as the biggest consumer of iron ore, China will be terrified of a combined BHP/ Rio group monopolising the market and driving up costs. Alternatively, it might want to get its hands on some of Rio’s other assets, through acquisitions or joint ventures. Or it may just want to make sure that it has an influential voice at the negotiating table.
This revised offer should at least get BHP to the table, even if it’s is not the knockout bid some were expecting. But the Chinese have such deep pockets that they can afford to be as influential as they want to be – and unlike BHP, which saw billions wiped off its share price this morning, it doesn’t have shareholders to please. And whoever emerges victorious, there’s a good chance that other national regulators and governments will cry foul at the potential threat to competition.
So there’s clearly plenty of life in this takeover battle yet...