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
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.