Hostile bid a novel idea

It's not often you find the bidder in a takeover battle arguing that it's too hard to actually make a bid, while the reluctant target argues the opposite – that it's easy: go ahead, make my day.

But the next stage of the increasingly fascinating duel between BHP Billiton and Rio Tinto is likely to be an argument about whether or not a hostile bid is possible, with BHP saying it's not and Rio countering that it is. It's all a bit weird.

BHP has said all along that a merger of the two companies must be a scheme of arrangement supported by the Rio board – that this is the only way Rio shareholders will get the benefits of combining them.

So it's in BHP's interests for the shareholders to believe that a hostile bid is impossible (so they'll pressure the board into supporting a scheme).

Rio's board and management meanwhile have locked themselves into opposing BHP's 3 for 1 bid as "two ballparks away”.

As far as they are concerned there will be no approved scheme of arrangement anywhere near 3 for 1. If BHP wants to launch a hostile bid for Rio, they say, go right ahead – in fact "put up or shut up”. And what's more, it is far from impossible – it's easy.

So, is it easy or not? Well, anything is possible in the world of regulated capitalism, but this thing would be tough, that's for sure.

Simultaneous bids would have to be made for two companies – Rio Tinto plc, listed in London, and Rio Tinto Ltd listed in Australia – and each bid would have to conditional upon the success of the other.

Under UK takeover law, all bids have to be unconditional within 81 days. This would be completely impossible in this case because this bid will have to be conditional on approval by European competition authorities, which will take an awful lot longer than 81 days.

Therefore, the London authorities would have to agree to BHP making a "pre-conditional” bid – that is, the 81 days doesn't start until a particular condition is satisfied (global competition approval).

A second waiver would be required from the Australian Securities and Investments Commission because Australian takeover offers must be mailed within two months. But the bid in Australia could not be mailed until it was also mailed in the UK, and that would have to await global competition approval.

But the main reason a hostile bid would be difficult is that Rio Tinto plc owns 37.4 per cent of Rio Tinto Ltd, a legacy of RTZ's original 49 per cent holding in CRA, before they merged and became a dual-listed company.

Rio's constitution says that those shares can only be sold with the approval of both sets of DLC shareholders in a sort of joint sitting of parliament, via an ordinary resolution (that is 50 per cent in favour required).

Why would the Rio directors call a meeting if it were a hostile bid they opposed? They wouldn't. It would have to be called by shareholders, which is not impossible, and of course the resolution would get up if a majority of shareholders intended to accept the offer.

These things combine into a high hurdle: it's not impossible for BHP to get a meeting requisitioned by a group of shareholders and then win the vote, as well get simultaneous waivers of takeover time limits in both Australia and London, but very tough.

There are really only two viable resolutions to the current impasse: Rio shareholders gang up on the board and demand that they negotiate a price for their support of a scheme – that is, a price more than 3 BHP shares for 1 Rio share – or else BHP goes away for six months, as required by the London takeover panel's "put up or shut up” rule, and waits for Rio to stumble.

At the moment, in my view, the latter is more likely. That's because BHP is hearing the gossip that Rio is trying to talk down analyst forecasts of its profit, a sign that the 2007 results will disappoint. In that case there is a fair chance the Rio share price will be lower in six months than it was before the bid was announced a month ago.

Then again, shareholders are hearing the same gossip and might come to the same conclusion about the Rio share price in six months as BHP, in which case they might demand that Rio directors go for a deal now.

This is actually a novel by Thomas Pynchon (The Crying of Lot 49).



Follow @AlanKohler on Twitter