BHP makes bid for Rio
- Jamie Freed
- February 6, 2008
BHP Billiton shares tumbled the most in 20 years after it launched a formal $US147.4 billion ($164 billion) hostile bid for rival Rio Tinto.
The 3.4-for-1 scrip offer was more than 10 per cent higher than the 3-for-1 proposal made public in November.
Rio had steadfastly rejected the earlier proposal and refused to negotiate with BHP.
BHP chief executive Marius Kloppers deemed the bid announced today "compelling''. But he did not rule out the possibility of signing a scheme of arrangement with Rio if the pair can agree on the terms.
Today's higher bid compares with a ratio of 3.21 BHP shares for Rio shares when trading ended in Australia yesterday. By the end of day's trading, the ratio had edged higher to 3.47.
BHP Billiton shares plunged after the bid announcement and its half-year earnings report, sinking as much as 8.4%, or $3.33, to $36.32. By the day's end, the shares had shed 7.5%, or $2.99, or $36.66, the worst one-day fall since December 11, 1987, according to Bloomberg data.
The slide contributed about a third of the overall decline in the benchmark S&P/ASX200 share index, which ended trading at the day's low, losing 183.5 points lower, or 3.2%, to 5609.4.
Rio shares gave up early gains to decline as much as $2.05, or 1.6%, to $125.30. They ended the day down 21 cents, or 0.2%, at $127.14.
In a statement issued this morning, Rio chairman Paul Skinner said his board would carefully consider the terms of the bid ``in the light of all circumstances'' and would make a statement after it had completed its assessment.
BHP's hostile bid requires the acceptance of more than 50 per cent of shareholders in the UK and Australian-listed arms of Rio.
That means Chinalco and Alcoa, which last week purchased 12 per cent of Rio's London stock, are unlikely to be able to block the bid.
The pair are believed to be interested in purchasing aluminium assets formerly owned by Alcan, but the 50 per cent acceptance condition of the bid could leave them with little leverage.
The BHP-Rio tie-up would need the approval of several competition regulators around the world most importantly the European Union and therefore it will take nine to 12 months before the bid's "pre-conditions'' are dropped.
BHP will not send out a bidder's statement before it receives those approvals. The offer must also be approved by the majority of BHP's shareholder base, both in the UK and Australia.
"The premium offered here to the Rio Tinto shareholders is large at 45 per cent [to the price before the November approach was made public],'' Mr Kloppers said.
"That means they get an immediate uplift in value. Plus because it's a scrip-for-scrip exchange they share in the future synergies and benefits they can create.''
He said the bid would be "earnings accretive'' to BHP after the first year of the merger, based on BHP's plans for a $US30 billion share buyback.
BHP has raised $US55 billion down from an initially-planned $US70 billion to help finance the offer and the planned share buyback.
The $US25 billion of debt not allocated to the share buyback will be put toward re-financing Rio's loans from the $US38.1 billion acquisition of Canadian aluminium producer Alcan last year.
BHP said it would also consider asset sales given the enlarged size of the merged group would make some operations look less attractive.
Mr Kloppers continued to brush off suggestions the deal would prove bad for steelmakers due to the increased concentration of the iron ore market.
"We will produce more product more quickly and more cheaply,'' he said. ``That will become very apparent as we proceed forward in time.''
Earlier, BHP blamed exchange rate movements and higher input costs for a 2.4% drop in first-half net profit.
Profit for the six months ended December 31 was $US6.017 billion ($A6.68 billion), with underlying profit, or earnings before interest and tax (EBIT) up 5.4% to $US9.623 billion ($A10.74 billion).
Profit from operations, which excludes pre-tax exceptional items, was $US9.486 billion ($A10.59 billion), up from $US9.134 billion.
The bottom line result was lower than analysts had expected with forecast ranging between $US6.3 billion ($A6.99 billion) and $US7.75 billion ($A8.6 billion), AAP reported.
But sales grew by 15.5 per cent to $US25.539 billion ($A28.51 billion), reflecting higher commodity prices.
Costs increased by 1.9 per cent, which the company said was an ``excellent'' result given higher raw material, fuel, energy and labour costs.
BHP Billiton said that in the medium term demand growth for its major commodities should remain robust.
Bulk commodity contract prices and oil and thermal coal prices should remain strong.
The company also expects the industrialisation of China to drive strong demand growth over the longer-term.
However, the pace of global economic growth had moderated as a result of a worldwide credit crisis.
BHP Billiton expects the global economy to slow in the short-term as developed economies experience a moderation in their economic activity.
The company delivered equal record production for seven major commodities in the first half, resulting in record interim earnings for the group's iron ore, petroleum and manganese divisions.
``Our performance has not only benefited from the unique diversificatino across petroleum, bulk and non-ferrous commodities, but also the divesification within each of these broad categories,'' the company said.
``Record half year earnings from petroleum in a environment of strong prices, were the result of excellent management of natural field decline and volume growth from new projects.''
Increased prices and sales volumes pushed underlying earnings for the company's iron ore division 19.2 per cent higher to $US1.673 billion ($A1.86 billion).
High oil prices helped to drive earnings in the petroleum division 22.3 per cent higher to $US1.972 billion ($A2.19 billion), while the company's manganese group reported a 310.5 per cent increase in earnings to $US431 million ($A478.28 million).
BHP Billition said a weaker US dollar exchange rate had negatively impacted its underlying EBIT by $US506 million ($A564.83 million).
Inflationary pressures on input costs had a negative impact of $US206 million ($A229.95 million).
``These pressures were most evident in Australia and South Africa,'' it said.
BHP Billiton declared an interim dividend of 29 US cents per share, up from 20 US cents the first half of fiscal 2007.