BHP Billiton's $140-billion offer for Rio Tinto set the market abuzz in November and looked likely to spark a bidding war following reports that China's biggest steelmaker was preparing to crash the party.
Under the all-share offer, quietly made to Rio Tinto management twice—and rejected twice—the two companies would join forces to create a $350-billion mining group, the biggest in the world, with control of vast quantities of iron ore, copper, uranium, coal, diamonds and other commodities.
Rio's chief executive officer, Tom Albanese, has said BHP's three-for-one stock proposal undervalues his company. BHP's chief executive officer, Marius Kloppers, responded, "The bottom line here is simple. These two companies are worth more together than apart."
BHP said the proposed merger would provide annual cost savings of $1.7 billion in the third full year following completion, rising to $3.7 billion by the seventh year. By sharing large-scale, low-cost, long-life assets, the merged entity could optimize supply logistics by way of blending or improved delivery.
BHP also has proposed lining up a share buyback of about $30 billion after the merger as a sign of confidence in the strength of the deal.
At the heart of the proposed tie-up is the combination of iron ore assets. The joint company would equal Brazil's Vale in size, with combined output of 277 million tonnes per year, or about one-third of the world market. BHP and Rio are the second- and third-largest iron ore miners in the world, respectively.
Steelmakers around the world moved quickly to oppose the proposed merger, fearing that the company would be able to exert too much power over the iron ore supply chain. The combined market share also would be a major sticking point with antitrust regulators in some countries.
Joining forces also would see the company become the largest copper producer in the world with output of around 2 million tonnes a year, ahead of state-owned Corporacion Nacional del Cobre de Chile (Codelco), the world's biggest producer currently, which produced 1.68 million tonnes in 2006.
Rio's acquisition of Alcan Inc. also would make the new entity the world's largest aluminum producer, with output surpassing 5 million tons annually, topping United Co. Rusal with around 4.1 million tons.
For its part, Rio is actively trying to fend off the approach and pledged to boost production and divestments, including the potential sale of some North American assets. In an attempt to win shareholder support for its growth strategy, it boosted its divestment target to at least $15 billion from $10 billion and increased its 2007 dividend by 30 percent.
Despite its best attempts, Rio now looks very much in play, and the race to land the Anglo-Australian mining giant might have just begun. As AMM went to press, reports surfaced that Shanghai Baosteel Group Corp., China's largest steelmaker and a major customer of both companies, was eyeing a potential $200-billion offer for Rio Tinto.