MAC: Mines and Communities

Chinese Chequers

Published by MAC on 2007-12-14

Chinese Chequers

14th December 2007

As reported last week on this site, rumours have been circulating that China's premier steel-maker, Baosteel, backed by the country's sovereign wealth fund (CIC), might make a bid for Rio Tinto to block attempts by BHPBilliton to take over its closest rival. See:

For its part, Rio Tinto may shortly invoke the so-called "put-up-or-shut-up" clause in the UK Takeover Code. This means that BHP Billiton would have to make a final offer for its closest rival very soon or withdraw, at least for a while, from the skirkish..

As Interfax news service comments: "This new move may goad China into action, as it definitely does not want to deal with the combined weight of a merged BHP and Rio."

It's therefore possible that the Chinese - backed by Blackstone, one of the world's biggest hedge fund and private equity groups (in which the Chinese govenment itself has a 9.4% stake) - might still make a bid for the UK miner.

Chinese and international players deny counter bid for Rio Tinto

A number of Chinese and international companies have denied recent market speculation over plans to mount counter bids for Rio Tinto, after the company rejected a takeover proposal from BHP Billiton last month.

Blackstone, an international equity group, Monday denied media reports that it is planning to acquire and carve up Rio Tinto as part of a consortium believed to include China's sovereign wealth fund, China Investment Corp. (CIC), saying that it is "not involved in this transaction in either an investment or advisory role". CIC acquired a 9.4 percent stake in Blackstone for $3 billion in May this year.

"The China Iron and Steel Association (CISA) has proposed that the Chinese government and domestic steel mills jointly bid for Rio Tinto. However, discussions between the CISA, domestic steel mills and the government are still at an early stage," a Chinese steel industry source told Interfax Tuesday.

On Dec. 7 this year, Baoshan Iron and Steel Group (Baosteel Group), China's largest steel mill, denied a 21st Century Business Herald report that the company is planning to place a bid for Rio Tinto.

Baoshan Iron and Steel Co. Ltd., Baosteel Group's Shanghai-listed subsidiary, suspended stock trading Tuesday and plans to resume trading tomorrow after releasing an announcement. The suspension comes amid market speculation that Chinese companies could be involved in a counter bid for Rio Tinto.

"The trading suspension is more likely to be about a recent share incentive plan, rather than other market rumors," an Essence Securities analyst, who asked to remain anonymous, said.

Baosteel's share incentive plan has already gained approval from both shareholders and the State-owned Assets Supervision and Administration Commission, and is currently awaiting examination from the China Securities Regulatory Commission.

Rio Tinto announced Tuesday it has applied to the UK Takeover Panel Executive to request a deadline for BHP Billiton to either confirm or deny its intention to continue moves to acquire Rio Tinto. If BHP Billiton decides to drop its takeover attempt, the company will be banned under the UK Takeover Code from making any new takeover moves for six months.

"We are still committed to our proposal and would like Rio Tinto to engage with us. It is a matter for the takeover panel and we don't want to give further comment," a BHP Billiton spokesperson said.

Rio Tinto's attempt to use the so-called "put-up-or-shut-up" clause in the takeover code comes after Rio Tinto's board rejected a takeover bid by BHP in early November this year. The company's chief executive officer, Tom Albanese, said on Nov. 26 that BHP's three-for-one share proposal fundamentally undervalues the company and its prospects.

Industry institutes and steelmakers in both Europe and Asia recently voiced strong opposition to the proposed merger between Rio Tinto and BHP Billiton, amid concern that it would create a near monopoly over global iron ore supplies.

BHP still chasing Rio merger

BHP Billiton believes there is "compelling logic" behind its proposed merger with Rio Tinto, and the company intends to continue to search for opportunities to further discuss the proposal in the future, BHP Billiton announced Wednesday.

"Our proposal to Rio Tinto is about value, and in particular, it is about unlocking material value through the combination [of the two companies], that would otherwise be lost," Marius Kloppers, BHP's chief executive officer, said in the announcement.

The company also said that the argument that Rio is undervalued compared to BHP is unsustainable, since BHP's market capitalization exceeded Rio's by more than $100 billion at the date of the BHP proposal.

Rio Tinto's board rejected BHP's proposal for a three-for-one share swap in early November this year, and has since then refused to discuss the issue with BHP.

BHP's Wednesday announcement came one day after Rio Tinto requested a deadline from the UK Takeover Panel Executive for BHP to either confirm or deny its intention to continue moves to acquire Rio Tinto.

The proposed merger has been received coldly by the international steel industry, and also led to speculation that China, the largest iron ore consumer and largest steelmaker in the world, may block the merger by placing its own bid for Rio Tinto. However, this speculation was recently denied by Chinese steel mills and the China Investment Corp., the country's sovereign wealth fund.

Interfax commentary: BHP Billiton seems to be playing a waiting game with Rio Tinto, in the hope that Rio shareholders will go against their board and accept BHP's current three-for-one share offer. However, with no movement from Rio shareholders, the company is pushing home its advantage by invoking the "put-up-or-shut-up" clause in the UK Takeover Code. This new move may goad China into action, as it definitely does not want to deal with the combined weight of a merged BHP and Rio. There may be an opportunity for China through a deal with Blackstone, as the other alternative is for Baosteel to attempt an acquisition bid, which is slightly lopsided as Rio Tinto is worth about $150 billion, while Baosteel is only worth about $40 billion. Moreover, any team-up with the CIC may run afoul of overseas sovereign asset protection agencies, especially at the rate that China is snapping up assets in Australia. Watch for news on Sinosteel's bid for Australia's Midwest Corp.

Interfax China Mining and Metals, 14 December 2007


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