It is almost a year since BHP Billiton abandoned its $62bn pursuit of Rio Tinto and…
people are starting to speculate.
Earlier this week, the Australian Financial Review asked whether BHP might bid again if the proposed iron ore joint venture (IOJV) between the two companies collapses.
Sources say Rio will either walk away under pressure from its shareholders to secure a higher premium for handing BHP all the optionality in its best interests; or will BHP dump the joint venture in favour of a full takeover of Rio; or the European, Chinese and Japanese regulators will block the deal.
And there are good reasons for thinking the IOJV will not be voted by through Rio shareholders in Australia, as analysts at Citigroup pointed out on Friday morning:
With the rights issue successfully completed and significant progress made on the asset sale process, there is no longer the balance sheet pressure for RIO to do the IOJV, although the US$10+b in synergies to be carved up between the two is still undoubtedly an attractive prize.
The Ltd or Australian register only represents 22% of the RIO voting shares, but they are likely to have an ally in Chinalco (12% of Plc and 9% overall) whom we expect to oppose the deal.
If global growth continues to recover and the iron ore market remains tight, more shareholders may begin to question the merits of selling down the interest in the iron ore business given that it is the highest returning and highest growth asset in RIO, despite the synergies being generated.
But does BHP still have the appetite for Rio? That’s difficult to answer, although the following points are worth noting say Citi:
- BHP has the balance sheet strength to do a deal.
- No other transaction offer the synergies, asset quality and growth options like Rio.
- BHP would not have to put significant debt facilities in place this time again because Rio has repaid much of its short term debt.
- And the market for divesting non-core assets has improved markedly over the past 12 months.
This last point is particularly important because a deal would inevitably face scrutiny from regulators, particularly in Europe. When the original deal fell apart, “people” close to BHP hinted that it would have struggled to complete the disposal of iron ore mines required by the European Commission. Anyway we reckon this will run and with that in mind the following dates are worth remembering:25-27 November 2009 — Under UK Takeover Panel regulations BHPB cannot come back and bid at a lower ration until 12 months after pulling out from the previous bid — BHPB withdrawal from original RIO bid was announced on 25th November but did not officially lapse until 27 November.
5 December — target date for reaching a binding agreement between BHPB and RIO on the IOJV.
March/April 2010 — target date for clearance of regulatory approvals for the IOJV — the critical one being EC approval.
Mid-10 — implementation of the IOJV after shareholder approval — simple majority approval required from both shareholders.
For what it is worth, if BHP does bid again Citi thinks it would offer 2.3 of its shares for every Rio share. This is around a 30 per cent premium to the current price, but significant below its previous offer, which adjusted for Rio’s rights issue, was worth 2.68:1.
Related link:
Rio Tinto bets on metal recovery – FT