Rio pulls the pin on BHP

BHP Billiton's attempt to get Rio Tinto really is "dead in the water”, as Rio chief Tom Albanese said the other day. That wasn't a rhetorical flourish from Albanese, just a statement of fact.

My only hesitation in writing that after last night's desperate, combative performance by BHP chief Marius Kloppers is that it's exactly what he would like us commentators to write.

BHP's only hope of pulling off this transaction now is to stampede Rio shareholders towards the Rio board with a demand that they negotiate. For this to happen, as with political parties during election campaigns, BHP wants to be viewed as the underdog.

And, right now, BHP fully deserves to be seen as the underdog: the bid looks doomed.

Since both companies are dual-listed companies located in both London and Australia, a takeover bid by BHP for Rio is near enough to impossible, because of the interlocking waivers needed from regulators in both places, not to mention the approvals required from European competition regulators.

That means it must be a scheme of arrangement, as BHP has proposed, for which the precondition is the support of the Rio Tinto board and management.

But, as Kloppers pointed out last night, Rio has instead triggered the London Takeover Panel's rule 2.4 – the so-called "put up or shut up” provision. It has, in effect, pulled the pin on a grenade.

That's because rule 2.4 requires a bid to be made, not a scheme of arrangement. BHP and its advisers see the "put up or shut” process as mutually exclusive with negotiating. If Rio's directors had any intention of eventually engaging with BHP, after a suitable period of huffing and puffing, that letter would not have gone to the Panel.

In other words, BHP now believes, and will argue, that Rio's directors and executives are intent upon remaining independent, not just trying to get a better deal for their shareholders.

For that reason, a month's worth of fairly polite circling of each other by BHP and Rio has now turned hostile and they have begun slugging it out. Last night's briefing by Marius Kloppers was a hostile act designed to up the ante and put pressure on the Rio board. It was also a bit desperate.

Having seen by the application of rule 2.4 letter that the Rio board is really seeking independence, not "value” as they claim, Kloppers is now trying to appeal over their heads to the Rio shareholders.

That would require a U-turn by those shareholders, because up to now they have been egging on CEO Tom Albanese's strategy of trying to talk up the value of Rio. It has looked a perfectly normal start to a takeover negotiation.

But beneath the surface the tactical ebbs and flows have been subtle and delicate.

Rio is keen not to be seen to be trying to scuttle the deal; BHP hasn't wanted to push too hard for fear of backing Rio's directors into a corner. BHP argues that 3 for 1 represents a premium of 12 per cent on Rio's market value before the bid (market cap ratio was 36:64, BHP's proposal is 40:60); Rio argues that it was undervalued by the market.

Tom Albanese says "it's all about value”; Marius Kloppers says "I agree”.

But they are both wrong: it's all about politics, and the timeless question of who is and who isn't the underdog.


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