Investors seem sure that mining giant BHP Billiton will continue its $149 billion pursuit of Rio Tinto, a combination that would control more than one-third of the world's iron ore sales.
Rio Tinto rejected BHP Billiton's 3-for-1 share offer Thursday, but share price movements in London and Australia indicate investors expect BHP Billiton to increase its offer, the bid to turn hostile or another bidder to emerge.
BHP said in an overnight statement confirming its approach to its mining rival that it "intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto."
A combination would create synergies throughout both Anglo-Australian mining companies and increase the range of products they can market while eliminating duplication and competition, said Prof. Tony Naughton, a stock market and economics expert at Australia's RMIT University.
"The key to it is they are both competing head on in a major sector, in iron ore, and replicating each other's activities," he said. "There'd be synergies all the way through in terms of logistics and shipping."
Rio Tinto shares surged as much as 22 percent Friday on the Australian Securities Exchange before falling back to close at 130.90 Australian dollars ($121.29), still up 15.4 percent. Shares of BHP Billiton, meanwhile, fell 1.8 percent to A$42.47 ($39.35), after having gained as much as 1.3 percent earlier.
In London Thursday, where both companies are also listed, Rio Tinto's share price jumped 22 percent and BHP Billiton's fell 5.7 percent. On Friday, Rio Tinto rose another 6.9 percent to 5,660 pence, while BHP rebounded 3.9 percent to 1,721 pence.
Dealogic calculated BHP's offer to be worth $149 billion, which would make it the world's largest since Vodafone AirTouch's $172.2 billion takeover of German telecommunications company Mannesmann in a deal completed in 2000.
It would also eclipse Rio Tinto's $43 billion offer in May for Canada's Alcan, the biggest deal involving a mining company to date.
Tony Robson, an analyst at BMO Capital Markets, told Dow Jones Newswires that BHP Billiton's offer sets the agenda only, leaving the door open for revised terms. Banks would be queuing up to provide debt to sweeten the offer, he said.
Analysts say BHP may have to increase its 3-for-1 share offer to at least a 3.5-for-1 offer to encourage Rio to enter discussions.
"Will it go hostile? I don't know. I guess it depends on what other proposals BHP comes up with," said Warren Edney, an analyst with financier ABN Amro.
A BHP Billiton spokeswoman said Friday there was nothing to add to Thursday's statement.
"We've rejected the proposal, and we've got nothing further to report," said Rio Tinto spokesman Ian Head.
Rio Tinto's objection to the deal is that it "significantly undervalues" the company, it had said in an earlier statement.
Mining Companies' Positions in the Industry
BHP Billiton, Rio Tinto and Brazil's Companhia Vale do Rio Doce, or CVRD, account for 70 percent of all global iron ore sales. BHP Billiton accounts for around 15 percent, with Rio Tinto responsible for 24 percent, which would give a combined company a 39-percent share of the world iron ore market.
Earlier this year, speculation swirled that CVRD would team with BHP Billiton in a joint bid for Rio Tinto, then break up the company.
Naughton, the professor at Australia's RMIT University, predicted that CVRD will join the bidding or perhaps a Chinese investment fund.
"The BHP bid doesn't seem to be welcomed by Rio and the only real alternative bid would be from CVRD and I suspect that will happen," Naughton said.
"CVRD is the big, dominant player out there (in the iron ore market) and here they are now looking at falling way back into second place," he added.
Australia's competition regulator, Australian Competition and Consumer Commission, said Friday that concerns about dominance of Australia's iron ore market would be central to any investigation into a merger. The deal would need the approval of Australian regulators.
Prime Minister John Howard said any merger or acquisition was a matter for the companies' shareholders and directors to decide.
"Anything that strengthens the focus on Australia as an economic powerhouse is good for this country," Howard told Melbourne Radio 3AW.