That series of heavy thuds you just heard was Rio’s Tom Albanese throwing everything, including the kitchen sink, at BHP Billiton’s Marius Kloppers.
Projections of massive increases in iron ore and copper production, a doubling in synergies from the Alcan takeover, a potential trebling of the divestment program from $US10 billion to $US30 billion and an 87 per cent increase in dividends over the next three years were among the arguments Albanese mounted to try to convince his shareholders that Rio has a more prosperous future as a standalone company than it does subsumed within BHP.
"It’s all about value," Albanese said, arguing that Rio’s history of "under-promising and over-delivering" had led to an "under-appreciation" by the market of its prospects and value.
In fact, while it is possible that Albanese is right and the market hasn’t properly appreciated Rio’s potential, from the moment BHP lobbed its proposal for a scrip-based merger the issue wasn’t one of absolute value, but relative value.
Albanese is effectively arguing that his pipeline of projects, particularly in iron ore, is longer and fatter and more attractive than BHP’s. In iron ore he is probably right. Kloppers, of course, would probably make the same case about the market’s appreciation of his group’s potential, although his emphasis might be slightly different. Even if Albanese were right, however, that wouldn’t undermine the case for a merger, but simply make the case for better terms.
It is inarguable that a merger of two such complementary companies, operating in similar commodities as well as similar regions – in the case of iron ore, nearly identical provinces – would throw off massive synergies.
It is also inarguable that those synergies aren’t available to either Rio or BHP unless there is a merger.
Therefore, the real issue is how the value is apportioned between Rio and BHP shareholders – whether the 41:59 split BHP proposed as its opening gambit represents a fair sharing, or whether Rio brings significantly more than that to the table.
It was unclear from Albanese’s comments whether the investor briefing and the upbeat commentary he provided was designed to try to see off BHP or was a tactic to enlist the market’s help in creating pressure for far better terms – or both. Rio could have made its case to BHP privately in negotiations over the terms, of course, but has so far refused to engage with its suitor.
That again may be tactical, to get BHP to bid against itself, or perhaps Rio doesn’t want to surrender its independence at any price – Albanese skillfully dodged questions about his attitude to the concept underlying the proposal.
Whether the expansion proposals outlined in the briefing have the desired effect (whichever that may be) depends on the market’s response. While the big increase in the Alcan synergies, from $US600 million to $US940 million, was "new news," the continuing ramp-up of Rio’s Pilbara production, the promise of its Simandou iron ore project in Guinea and the increasing value of its copper interests should have been known to the market.
Rising tides lift all boats. The increasing confidence that the China phenomenon is a structural change in the supply/demand relationship for commodities brings a lot of projects into the pipelines and encourages the acceleration of their development. That’s as true of BHP’s portfolio as it is of Rio’s. Rio has to convince the market that the "China effect" will be relatively, and materially, larger for its portfolio than for BHP’s. It isn’t sufficient to argue that the market undervalues its position and prospects – it needs to be able to demonstrate they are materially undervalued relative to BHP’s.
That in turn means convincing the market that in valuing two of the biggest and longest-established resource groups in the global industry, both operating in similar jurisdictions and at their heart, focused on the same or similar commodities, it got the relativities badly wrong.
Actually it is slightly more complicated than that – and more challenging for Rio – because there is a very substantial overlap between the two investor bases. Rio has to convince the 60 to 70 per cent of its shareholders who are also invested in BHP that they valued BHP correctly but got Rio’s value wrong to the point where the 25 per cent premium over the pre-proposal relativities (about $30 billion of value) doesn’t come close to aligning the relative value offered by BHP with the relative contributions the two shareholders bases would make.
Making that case isn’t impossible, but it has a degree of difficulty attached to it that would normally be associated with 10 metre platform diving at the elite level.
The next few weeks may well tell the story. Rio, whose share price had consistently and significantly under-performed BHP before the merger approach was revealed, needs to get a clear and solid share price boost from the investor briefing and the investor roadshows it plans as a follow-up. In relative terms, of course.