Rio Tinto: New BHP Offer Neglects its "Underlying Value"

By Jason Simpkins
Associate Editor

Rio Tinto PLC (RTP) rejected BHP Billiton's (BHP) revised $147 billion takeover bid hours after its rival made its offer yesterday [Wednesday].

In a statement, Rio Chairman Paul Skinner said the bid failed to recognize the "underlying value" of the company's assets and prospects.

"Our plans are unchanged, and will remain so unless a proposal is made that fully reflects the value of Rio," Skinner said.

The statement echoed sentiments previously offered up by Tom Albanese, Rio's chief executive officer. He cantankerously rejected BHP's original offer of $127 billion in November saying it "significantly undervalued" the company and its prospects. Albanese added that the offer was not just out of the ballpark, but "several ballparks away" from being an accurate appraisal.

The new offer was a 13% increase from the previous, and valued Rio at 13.6 times earnings before interest and tax. It equated to 3.4 BHP shares for every one share of Rio, an improvement on the previous three-for-one offer. Rio shareholders stood to retain 44% of the resultant company under the new terms, up from 41%.

"It's still obviously well short of where Rio places its value," Charles Kernot, an analyst at Seymour Pierce Ltd. told Bloomberg News. "BHP were right to increase their bid [yesterday] to show they are serious and I suspect there is still something in their back pocket to raise it a little bit more."

Yesterday's deadline for BHP to "put up or shut up" was a mere five days after Aluminum Corp. of China (ACH) bought a 9% stake in Rio, with the obvious intent to derail BHP's attempted acquisition.

Had Rio accepted BHP's offer, it would have created a resource group capable of holding sway over a considerable portion of the world's resources including supplies of copper, aluminum, coal and iron ore.

A potential BHP-Rio Tinto conglomerate would supply a third of the world's traded iron ore and be the world's biggest producer of aluminum and energy coal. The company would control virtually the entire iron-ore industry in Australia, China's biggest supplier.

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