BHP Pitches $30 Billion Buyback; Rio Unmoved

BHP Billiton on Monday mapped out its plan for acquiring rival Rio Tinto, promising to hand shareholders $30 billion via a share buyback if the deal goes through, in the hope of drawing Rio's board into talks.


BHP has so far been unable to persuade Rio's board to discuss its $140 billion all-scrip takeover proposal aimed at assembling a mega force in mining of everything from iron ore and manganese to copper and diamonds.

"BHP Billiton now considers it appropriate to make BHP Billiton and Rio Tinto shareholders aware of its proposal so it can seek their support for discussions between the two companies," BHP said in a statement.

A Rio spokesman said there was nothing new in the BHP release, and BHP's proposal, already rejected by Rio's board as too low, remained "well out of the ballpark".

BHP outlined $3.7 billion in savings in the seven years after a merger via synergies in iron ore, coal and other activities.

The savings would occur mostly through higher production runs and efficiencies of scale and help insulate against cyclical down swings in commodities markets, BHP said.

The one-time "Big Australian", which now operates in 25 countries, also attempted to defuse concerns that a bid would run foul of anti-trust regulators, particularly in iron ore, where it would hold 27 percent of the world market.

It said it saw "no significant barriers", although it would probably take 9-12 months to gain the necessary approvals.

The world's biggest mining house also vowed to maintain a progressive dividend policy post-merger, leaving Rio shareholders with 41 percent of the company.

Newly-installed BHP Chief Executive Marius Kloppers may take the unusual step of contacting Rio's big shareholders personally in the hope of selling the merits of the 3-for-1 offer and forcing fresh talks with the Rio board, a source close to the proposal told Reuters.

Rio Tinto
Rio Tinto

Rio Tinto shares jumped as much as 10.4 percent in Sydney on Monday, building on a 15.4 percent rise on Friday after BHP confirmed its approach. BHP was flat at A$42.47.

Analysts are divided on whether Rio's board is looking for a cash-or-scrip-sweetened alternative proposal from BHP, or is simply aiming to keep BHP at bay altogether.

But BHP has already dispatched advisers Citigroup and Goldman Sachs to arrange $70 billion in debt refinancing to help pay for a takeover.

Klopper's pitch could be easier given that 60 percent of Rio Tinto shareholders reportedly hold BHP stock.

Rio's board is open to a higher BHP approach, especially if it involves a cash component, sources have said.

"It seems they (BHP) are open to a bid but they just think the price is too low ... (Rio) are wanting to have a conversation with them to talk about the bid, talk about the synergies, talk about the rationale," the source said.

Rio on Thursday rejected BHP's offer pitched at a premium of about 14 percent to Rio's Australian share price at the time, saying it was too cheap. Rio itself this year was forced to pay a 65 percent premium to acquire Canada's Alcan at a cost of $38 billion, payed for it with debt.

Cash flow and earnings per share would be accretive in the first year if BHP and Rio teamed up, BHP said.

British newspapers reported over the weekend that BHP may look to sell its oil and gas arm for $40 billion to help fund a bid for Rio, which is not in the oil business.

A BHP spokeswoman declined to comment on the reports.

Flush with new-found riches thanks to booming demand for raw materials for industrial use, share buybacks and dividends have accelerated in the mining sector as companies sought to reward shareholders after a lengthy period of weak returns.

Separately, China Development Bank on Monday denied a British newspaper report that it has bought a small stake in Rio.

"There is absolutely no such thing," a spokesman said.

CDB is one of China's three "policy lenders" that make loans explicitly in furtherance of government policies.

The Sunday Telegraph newspaper said CDB had taken a stake of less than 1 percent in Rio in a sign that China may intervene in the bid battle. China consumes nearly 50 percent of world iron ore production, while the two miners together would control almost 40 percent of production.