Rio Tinto Rejects Sweetened $147 Billion Bid by BHP

Mining giant Rio Tinto rejected a sweetened $147.4 billion takeover offer from rival BHP Billiton, saying the hostile still bid undervalued the company.

"BHP Billiton's offers, while improved, still fail to recognize the underlying value of Rio Tinto's quality assets and prospects," Rio Tinto's Chairman, Paul Skinner said. "Our plans are unchanged, and will remain so unless a proposal is made that fully reflects the value of Rio Tinto."

Earlier, Chinese state-owned aluminum company Chinalco and U.S. aluminum company Alcoa , which own a joint 9 percent stake in Rio, said they would wait for Rio's response before taking any action.

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A marriage of the two mining giants would be the second-biggest corporate deal in history and create the world's third richest company, with a market capitalization eclipsed only by Exxon Mobil and General Electric .

BHP sweetened its initial three-for-one approach, offering 3.4 of its shares for every Rio share after failing to persuade the Rio board to agree to a friendly merger.

"The Rio Tinto shareholders will now decide," Kloppers said.

BHP, which said its first-half profit fell 2.4 percent to $6.017 billion, needs at least 50 percent of holders of both Rio's Australian and London shares to accept for the deal to go through.

"This is our first and only offer," Kloppers told a media briefing, though he later would not say if that meant it was the final one.

He said BHP had not spoken with the Rio board before making the offer, but believed the offer had widespread support among Rio shareholders, 60 to 70 percent of whom also hold BHP shares.

The offer equates to a 45 percent premium to Rio's stock price in November before BHP first raised the idea of a union in a three-for-one share swap.

"It's a lot fairer than the offer we've had before. It's by no means a knock-out offer," said Bertie Thomson, a fund manager at Aberdeen Asset Management, who holds both Rio and BHP shares.

Shares in BHP fell 4.8 percent at A$37.75 on Wednesday, while Rio fell 0.3 percent to A$128.96.

Chinalco's Next Move

Chinalco and Alcoa, which last week built a surprise 9 percent stake in Rio Tinto, said they were watching for further developments after BHP made a bid for Rio.

"Together, we plan to closely monitor further developments, in particular any response from the board of Rio Tinto. As shareholders in Rio Tinto plc, we believe any offer should reflect the fundamental value of the company," the firms said in a statement by their Singapore-based vehicle Shining Prospect.

The statement made no mention of any possible counter bid, but London newspaper the Times, citing unnamed sources close to Chinalco, said on Wednesday a deal was in the works.

The newspaper said Chinalco was seeking approval in Australia to raise its holding to 19.9 percent and may go further to ensure the BHP bid is blocked.

However, sources familiar with the situation told Reuters that Chinalco is not currently mounting a bid for Rio, adding that the Chinese firm is in no rush to make the next move.

Long Opposed

Rio Tinto has long opposed BHP's overtures, arguing it was better off as an independent company, digging its own iron ore mines and churning out hundreds of thousands of tons of copper, zinc and aluminum.

Rio in a statement said it was considering the offer and advised its shareholders not to take any action.

Key customers for both companies, particularly steel mills in China and Japan, which buy hundreds of millions of tonnes of iron ore each year, have raised concerns about the potential dominance of a merged group.

"The offer should be enough to get BHP talking to Rio," said Rob Patterson, managing director of fund manager Argo Investments. "We think to raise the offer to that degree probably makes sense."

BHP's task was made more complicated last week when Chinalco teamed up with Alco for a stake. BHP said Rio shareholders would hold 44 percent of the merged entity, compared with 36 percent in the initial approach made last November.

The company earlier said it faced significantly higher input costs and unfavorable foreign exchange movements during the first half, although underlying earnings before interest and tax rose 5.4 percent to $9.6 billion.

The group posted record half-year results in its iron ore, petroleum and manganese businesses.

BHP also lifted its interim dividend to 29 cents a share, up 45 percent year-on-year.

-- Reuters contributed to this report