Rapaport Magazine

Clash of the Titans

BHP’s takeover bid for Rio Tinto turns hostile as the mining industry holds its breath.

By Michael Washburn
RAPAPORT...As speculation ran high about a possible hostile takeover of Rio Tinto by BHP Billiton, Rio Tinto — which recently completed its own acquisition of Alcan, becoming the biggest aluminum producer in the world — made moves that set off frenzied further speculation. According to a report published in The Wall Street Journal, Rio Tinto’s executives were contemplating what the corporate world calls the “Pac-Man defense,” borrowing a phrase from a popular video game. In this maneuver, the prey, fleeing from monsters that want to co­nsume it, turns around and consumes them, or in literal terms, the company that has been the subject of a takeover bid launches one against the initial bidder. Although Rio Tinto sources called a counterbid by Rio Tinto unlikely, Rio Tinto shows no signs of assenting to the merger. Each side can point to evidence illustrating either the drawbacks or the benefits of a merger, and they both have their heels dug in for a tough takeover battle.

In the first week of November, Rio Tinto spokespersons soundly rejected BHP’s acquisition offer of three BHP shares for one Rio Tinto share, saying that the offer “significantly undervalues Rio Tinto and its prospects.” The spokespersons said that Rio Tinto’s board had unanimously found the offer to be counter to the interests of Rio Tinto shareholders.

Then, in the middle of November, representatives of TRC Capital Corporation informed Rio Tinto that TRC had executed a minitender offer to buy up to 250,000 American Depositary Shares (ADS) of Rio Tinto. Each ADS represented four ordinary shares of Rio Tinto. In response, Rio Tinto spokespersons advised against tendering the shares on the grounds that the offer came in below market value, besides being unsolicited.

The Rio Tinto spokespersons are correct that Rio Tinto has significant values and prospects — especially since the Alcan merger. Rio Tinto Chief Executive Officer (CEO) Tom Albanese told Reuters that the resulting combination creates “the world’s leading aluminum producer….Rio Tinto Alcan will be a strong operational platform to pursue new growth opportunities in aluminum.”

In a discussion with RDR, Nick Cobban, Rio Tinto's media relations advisor, highlighted key assets that he believed made BHP’s takeover terms inadequate. These included Rio Tinto’s vast reserves of copper, and iron ore deposits in Guinea that could yield 600 million tons of the metal per year. “If you look at our infrastructure, Rio Tinto has three ports and two railway lines. BHP has only one port and one railway line,” Cobban added.


Not to be bested, BHP representatives issued a statement of their own, declaring that they would “continue to seek an opportunity to meet and discuss [BHP’s] proposal.” But the phase of the takeover bid when spokespersons for the companies would meet in a genial manner to discuss the terms of a merger did not last long. Reports soon came out detailing a potential hostile takeover bid. BHP was considering selling its BHP Petroleum subsidiary — valued at approximately $40 billion — in order to raise funds to help cover the costs of a hostile bid, and had also opened discussions with investors in China about their possible role in financing the deal. The London Times noted that BHP was arranging a $70 billion bank facility through Citigroup. If the deal went through, BHP wanted to be able to refinance some of Rio Tinto’s debts, the Times story explained.

Many observers questioned the likelihood of the “Pac-man” strategy. Although Rio Tinto has impressive assets — especially since the Alcan merger — it is hard to argue with BHP spokespersons who consider their company to be in a superior position from the point of view of a takeover. As a Forbes.com article noted, BHP has a market capitalization of $135 billion, compared to $80 billion for Rio Tinto. The article quoted Charles Stanley analyst Tom Gidley-Kitchen saying that regulatory issues would probably require Rio Tinto to leave control of BHP more or less in Australia, and also noted that a theoretical Rio Tinto acquisition of the bigger company undercuts Rio Tinto’s current arguments against the economic logic of a merger.

Late in November, rumors emerged that the China Investment Corp. might be preparing a rival takeover bid for Rio Tinto, but Cobban dismissed the rumors as mere speculation.


If a merger does take place, it will be hard to overstate the importance of the deal for the diamond industry. Even though the diamond operations of the two corporations may pale in size and significance to other operations under both companies’ respective corporate umbrellas, the combined diamond divisions would make the merged company the third largest in the world, after De Beers and ALROSA. Viewed together, BHP and Rio Tinto’s diamond production in the year ended September 30, 2007, yielded 31.5 million carats, with 27.77 million coming from Rio Tinto. Besides the Argyle mine in Australia, Rio Tinto holds a 60 percent share in the Diavik mining operations in Canada and a 78 percent share in the Murowa mine in Zimbabwe. BHP holds an 80 percent share in the Ekati diamond mine of Canada, as well as exploration projects in Canada, Angola and the Democratic Republic of Congo (DRC).

Article from the Rapaport Magazine - December 2007. To subscribe click here.

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