Bhp Rethinks Offer After Raid On Rio

The Age

Monday February 4, 2008

Barry Fitzgerald, Resources Editor

THE potential for China's state-owned Chinalco to emerge as the most influential shareholder in BHP Billiton is looming large in BHP's frantic rethink on the future of its proposed $150 billion scrip offer for Rio Tinto - the subject of Friday's dramatic $16 billion share raid in London by the Chinese.

Should Chinalco take up an offer of financing from China's sovereign wealth fund, China Investment Corp, to increase its newly acquired stake in the dual-listed Rio from the current 9% to 20% with a view to accepting a BHP scrip offer for Rio, it could emerge with more than 8% in a BHP/Rio combination.

Such an outcome would first require BHP to increase its proposed offer to a level that would win an endorsement from Rio. It would nevertheless confirm the fears of resource exporting countries, including Australia, that China was intent on exerting production and pricing control over the commodities needed to underpin its industrialisation and urbanisation boom by taking up direct ownership of overseas operations and equity positions of influence.

But BHP has yet to say if it will now proceed with an offer for Rio. And the foreign investment powers of the Rudd Government to limit China's stake in Rio to 15% could be called on if it was decided that a march by the Chinese to become BHP's most influential shareholder was not in the national interest.

Prime Minister Kevin Rudd said yesterday that government officials were being briefed by the "corporate interests involved".

"Normal processes under Australian law would ensue. Those briefings are continuing over the weekend," Mr Rudd said.

Chinalco president Xiao Yaqing has arrived in Australia to put the group's case which, to date at least, has its raid on Rio as the simple acquisition of a "significant strategic stake" that reflects his group's "confidence in the long-term prospects for the rapidly evolving global mining sector".

He is due to hold a media conference in Sydney this afternoon and is expected to make a courtesy call on Federal Government ministers, presumably to ease fears about the group's intentions towards both Rio and BHP. Mr Xiao said in London on Friday that it was a coincidence that the raid on Rio - with America's Alcoa as a junior partner - came just days ahead of the deadline for BHP to decide if it will bid for Rio or walk away for at least six months.

The raid on Rio was widely interpreted as a move to block BHP, the world's biggest supplier of mineral commodities, from gaining greater price control in the key commodities of iron ore, aluminium, coal and copper by taking over Rio. But the potential for the Rio stake to be a stalking horse for what could be the main game - influence over a BHP enlarged by a takeover of Rio - is what BHP is now pondering.

BHP and its advisers spent the weekend rethinking the group's strategy on the Rio tilt in light of the Chinese intervention, first revealed on Friday night (AEDT).

That was after a BHP board meeting in Melbourne was wrapped up at 1.30pm, having decided on the group's response to the deadline imposed by the British Takeover Panel for it to "put up or shut up" with its Rio tilt, originally proposed in November as a 3-for-1 scrip offer.

The still secret decision has been overtaken by events, although analysts believe there could be no change from what they suspect was the decision made on Friday - stick with the spurned 3-for-1 offer on the basis that it could be increased at a later date to win an endorsement of Rio.

The reporter owns BHP shares.

© 2008 The Age

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