BHP Still Working Very Hard To Talk To Rio-Source

MELBOURNE -(Dow Jones)- BHP Billiton PLC (BHP.AU) is still working hard to discuss its takeover proposal with rival miner Rio Tinto PLC (RTP), but Rio is unlikely to meet unless there is a higher bid on the table, people familiar with the situation said Friday.

Analysts say that BHP would have to increase its 3-for-1 share offer to at least a 3.5-for-1 offer to encourage Rio to enter into discussions.

Rio Tinto shares were up 18% in early trade, matching a gain in London, after BHP Thursday ended months of speculation by saying Rio had rejected a deal, which could be worth more than US$100 billion.

At 0110 GMT, Rio Tinto was up 16% at A$131.35 and BHP was down 0.9% at A$42.87.

"We’re still working very hard to talk to them and have a conversation with them, that’s where we’re at," a person familiar with the situation told Dow Jones Newswires.

Rio Tinto is trading at a premium of around 5% to the rebuffed offer, with the market expecting a higher bid.

Asked whether BHP would consider going hostile, a person close to BHP said it isn’t "being considered at this stage".

Another person familiar with the situation said Rio’s board would assess any further request from BHP for talks but is unlikely to want to meet unless there is a higher bid on the table.

The person said there are concerns about the valuation of BHP shares relative to the company’s earnings.

"A cash bid on these companies would be extremely difficult and when you are doing a scrip bid, you’ve got to look at the relative value of the paper and see whether there is fair value in the scrip being offered," the person said. "And I think there is a feeling that BHP scrip is overpriced relative to the RIO scrip on a multiples basis."

BHP’s offer for Rio Tinto represents around a 15% premium over Rio’s closing price Wednesday.

"It is not surprising that Rio Tinto’s board rejected the offer from BHP given the premiums being offered in other takeovers," said ABN AMRO analyst Warren Edney.

Tony Robson, an analyst at BMO Capital Markets, said BHP’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, Robson said.

Should a competitive bidding process emerge with other mining companies entering the fray, cash will likely be king, and this will place BHP Billiton in a strong position, analysts said. BHP’s offer is an all-share offer, with each Rio Tinto share to be exchanged for three of its own.

But an analyst at an international brokerage said cash may not be needed to get Rio Tinto to the negotiating table.

The analyst, who didn’t want to be named, said he doesn’t think Rio Tinto is vehemently opposed to a deal, rather it is just looking for better equity terms as a starting point for talks.

Around 3.5 BHP shares for each Rio share may be enough to start negotiations, the analyst, who declined to be named, said.

But another person familiar with the situation said Rio’s board is "a million miles from thinking about cash or scrip" because the offer is "no where near" high enough.

"Rio isn’t engaging because there is nothing on the table that in their view warrants an engagement," the person said.

Macquarie Group (MQG.AU) said Friday it is advising Rio Tinto. Credit Suisse Group (CS), JP Morgan Cazenove Ltd., Morgan Stanley (MS) and NM Rothschild, are also advising Rio, say people familiar with the matter.

People close to both companies played down the possibility counter bidders will emerge, with Brazil’s Companhia Vale do Rio Doce (RIO) tipped as the only potential suitor that would have the muscle to launch a rival bid.

"I don’t think any of them are of the scale or have the amount of overlapping operations that these guys have to drive the amount of synergies," one source said.

BHP and Rio are the world’s number two and three iron ore producers and together with CVRD account for 70% of global iron ore sales.

Australia’s competition regulator said iron would be a focus in an examination of any BHP and Rio deal but sources close to both parties were divided on how serious the competition issues would be.

"Obviously we would have a look at it, because of particularly the iron ore holdings of both companies," a spokeswoman for the Australian Competition and Consumer Commission said.

Australia’s main opposition Labor Party would take its lead from regulators in ruling on a proposed merger between BHP and Rio if it wins a federal election due Nov. 24, a party spokesman said.

The person close to BHP played down the possibility a bid would face stiff competition hurdles.

"We wouldn’t have approached if we didn’t think it would get through," the person said. Asset sales may not be required, they said.

"Everyone thinks it can’t be done because they’re both so big…but you’ll find that’s not so far fetched at all and that it can get through with nil to minimal asset sales," the person said.

ABN Amro’s Edney says he’s not convinced there would antitrust concerns over combined iron ore business.

"CVRD is a major supplier into Europe, which is where antitrust concerns are strongest," Edney says, adding BHP and Rio’s Richards Bay Minerals mineral sands joint venture in South Africa is more likely to face scrutiny from regulators.

Robson, of BMO Capital Markets, agreed saying the iron ore business would face few antitrust issues as deliveries into Europe and North America are negligible. Robson noted possible concern for thermal, coking coal, aluminum and alumina divisions.

But one of the persons close to the deal said there would be "significant" competition issues.

"The Chinese and Koreans and everybody else are going to be in jeopardy, so there is going to be an uproar…they won’t want this to happen," the person said. "They are going to have to pass a whole raft of tests all around the world."

BHP said Thursday it had written twice to Rio Tinto and now "intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto".

Rio Tinto’s objection to the deal is that it "significantly undervalues" the company, it said in a statement.

A BHP spokeswoman says there was nothing further to add to Thursday’s statement, and a Rio spokesman wouldn’t immediately comment.