BHP Billiton has made a long-awaited bid approach to Rio Tinto in a move aimed at creating a $350 billion-plus mining giant, but Rio rejected the all-share proposal as too low.
Rio shares leapt as much as 30 percent in London to a record high on Thursday after it said BHP had proposed offering three of its shares for every one Rio share -- worth about $140 billion at current prices.
That would make it the world's second-biggest takeover deal after mobile phone giant Vodafone's purchase of Mannesmann in 2000 and would create a $360 billion company -- roughly the same size as U.S. computing giant Microsoft.
"The boards of Rio Tinto have given the proposal careful consideration and concluded that it significantly undervalues Rio Tinto and its prospects," Rio, the world's third-biggest miner, said in a statement.
The three-for-one offer would give investors a premium of 14.4 percent based on closing prices of the shares in Australia before BHP announced its offer, but this flipped into a discount of 6 percent after Rio's shares soared in London, implying investors expect a sweetener from BHP.
BHP, already the world's biggest miner, was undeterred at Rio's rejection. "BHP ... intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto," it said in a statement.
Rio Tinto spokesman Nick Cobban declined to say whether the firm would agree to talks with BHP about a possible link-up.
"The board has given its response to BHP on the proposal that it put forward and there it ends, as far as we're concerned at this stage," he said when asked about BHP's request.
At 1400 GMT, Rio shares in London were had gained 26 percent to 5,480 pence after hitting a record 5,638 pence. BHP was down 2.2 percent at 1,717 pence.
Mining Shares Rise
The news sent shares of other mining groups surging on hopes of a new wave of acquisition activity. Anglo American shot up 8.5 percent to 3,441 pence and Xstrata jumped 7.6 percent to 3,469 pence. Shares in Alcoa and Freeport McMoRan rose before the market opening in New York.
A marriage of BHP and Rio would assemble a massive corolling force across a range of industrial-use commodities such as copper, aluminium, iron ore and coal, but would likely face competition concerns.
They already jointly own Escondida, the world's largest copper mine in Chile, and both operate diamond mines in Canada and mine iron ore in Australia.
Analysts said a takeover would set off alarm bells for regulators especially in iron ore, where Rio and BHP are the world's second- and third-biggest producers respectively, behind Brazil's CVRD.
BHP said it was aware of competition issues, but gave no details about how it would overcome them.
"In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination," BHP said in its statement.
Analysts and fund managers said disposals were certainly part of BHP's game plan in seeking to swallow Rio Tinto.
"They must have taken into account that maybe as a combined group they would have to dispose of something. They've got the opportunity to pick the best assets of both companies and sell the worst assets," said portfolio manager Henk Groenewald at Coronation Fund Managers in Cape Town.
M&A Has Slowed
News of BHP's proposal comes amid a general downturn in mergers and acquisitions as banks rein in lending in response to losses on low quality U.S. mortgages.
"Clearly, one has to distinguish between M&A that might be funded by capital in credit markets, and here it would appear that it is a share exchange," Insight Investment fund manager Tim Rees said.
"It shows the clear scale of the synergies that might be available (and also) shows confidence within the mining industry about the global economy."
Investment banker John Meyer at Fairfax in London said the cost synergies are expected to total than $1 billion.
Long-standing speculation of a tie-up between BHP and Rio had gathered pace after Rio completed its $39.1 billion purchase of aluminium group Alcan on Wednesday.
Separately, Rio Tinto said on Thursday it was considering selling its Energy America unit, the second-largest U.S. coal producer.