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BHP Billiton and Rio Tinto continue to square up in public over a proposed merger, and it has fired up interest elsewhere in the sector, with Xstrata admitting today that consolidation chatter is ongoing.
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Evidence of the fire the BHP/Rio situation has lit under long-standing expectations of mining sector consolidation comes in Xstrata 's announcement that it is continuing in non-binding talks with a variety of potential partners over the potential of industry consolidation. The announcement was suitably ambiguous, but confirms talks have taken place and illustrates why Xstrata's shares have surged to all-time highs recently.
Meanwhile, at an investor presentation hurriedly convened after Rio Tinto demanded a put-up-or-shut-up order from the Takeover Panel, BHP chief executive Marius Kloppers presented his case again. He refused to sweeten the proposal and sought to refute arguments advanced by Rio Tinto chief executive Tom Albanese to justify rejecting BHP's offer.
For example, while Mr Albanese claims his company has the upper hand in terms of iron ore assets in Western Australia's Pilbara region, Mr Kloppers criticised him for fully consolidating reserves from joint ventures. He prefers equity participation reserve measurements; on this basis, the two companies are roughly equal.
Thirdly, despite the furore from steelmakers over the antitrust implications of a BHP/Rio tie-up in the iron ore business, Mr Kloppers said he foresees no regulatory remedy being required which would compromise the multi-billion dollar synergies he expects from the deal.
Mr Kloppers' keenness to argue his case suggests he is well aware analysts have done their sums and realise there is very little wriggle room for him to increase an all-paper offer without effectively handing control of the new company to Rio Tinto shareholders.
The fact Mr Kloppers did not even sweeten the offer slightly looks a missed opportunity, unless BHP really is willing to walk away. So an improved bid might not be the slam-dunk many expect. BHP and Rio remain fairly priced. Xstrata remains long term good value, but after a surge to 3,700p, more than doubling on our buy recommendation (1,806p 10 March 2006), investors looking for some Christmas cheer might want to bank some profits.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
