RPT-Rio shareholders underwhelmed by firmer BHP offer
Wed Feb 6, 2008 11:54am EST
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By Eric Onstad
LONDON, Feb 6 (Reuters) - Mining giant BHP Billiton (BLT.L: Quote, Profile, Research) sweetened its all-share offer for rival Rio Tinto (RIO.L: Quote, Profile, Research) on Wednesday just enough to prolong a takeover process, but not enough to swallow the firm, shareholders said.
Many investors said they would hold tight as BHP (BHP.AX: Quote, Profile, Research) seeks approvals from regulators and China mulls a possible counter-bid.
"It keeps them in the game, I think that's what it does, otherwise they would have had to go away," said Graham Birch, fund manager at BlackRock (BLK.N: Quote, Profile, Research).
The fund holds 22 million London-listed Rio shares worth 1.2 billion pounds ($2.36 billion) and 130 million BHP shares, according to Reuters Knowledge.
BHP launched a formal but hostile bid on Wednesday, offering 3.4 shares for each Rio share, up 13 percent from a preliminary level of three shares, hours ahead of a deadline by UK regulators to make a concrete move or walk away for six months.
Rio Tinto (RIO.AX: Quote, Profile, Research) quickly rejected the fresh bid as undervaluing the firm after previously spurning the initial unsolicited approach as also too low.
Shareholders said they would not press Rio to hold talks with BHP over the current offer.
"We know they can pay much more... I don't know what they're trying achieve with this," said a hedge fund manager in London who declined to be identified. "I think the right price lies in the region of four-to-one and I think at some higher three number Rio management would be pressured by shareholders, including ourselves, to sit down for talks."
BHP's all-share offer valued Rio's London shares at 51.68 pounds, about 4.6 percent below their closing price on Wednesday.
60-POUND THRESHOLD?
"My view all along has been that (a price) approaching 60 pounds is probably where serious negotiation starts," said Julian Chillingworth, chief investment officer at Rathbone Investment Management in London, which holds 4.6 million Rio shares according to Reuters Knowledge.
He said he was unlikely to accept the offer if a decision had to be made now, but BHP must get regulatory approvals, a process that could take a year, before it can send out offer documents.
Many Rio shareholders have called for BHP to add cash to its offer, but Chief Executive Marius Kloppers told a presentation in London that option was rejected due to the time lag.
"That means a considerable period of time where a lot of things can happen... We haven't considered cash for this deal for that reason," he said. BHP might have difficulty increasing its offer much further since the sweetened offer already gives Rio shareholders 44 percent of a merged firm and raising cash would be difficult amid a global credit crisis, Chillingworth added.
"I think there's two conundrums for the BHP board. One, they can't, for their own shareholders, give away more than 50 percent and secondly, the construction of a cash offer in these straightened times is difficult."
Last week's surprise move by China to grab a major stake in Rio might bring BHP and Rio closer together, the hedge fund manager said.
"They should sit down at an informal level. The earlier they come to a friendly agreement, the less likely the Chinese would be able to interfere," the hedge fund manager said.
"If the Chinese do something they will be seen as a hostile party and I don't think Rio's management want to be run by Chinese."
Chinese aluminium group Chinalco and U.S. Alcoa (AA.N: Quote, Profile, Research) rocked markets on Friday when they bought a 9 percent stake in Rio worth $14 billion and said they reserved the right to make a full bid for the group.
Regulatory filings show BlackRock sold around 6 million London-listed Rio shares last week, nearly a fifth of its holding, at 60 pounds a share, the price at which Chinalco bought its stake. (Additional reporting by Miyoung Kim) (Editing by Richard Hubbard)
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