HardAssetsInvestor

Written by Julian Murdoch  |

October 30, 2008

The Shark’s Still Circling

Details

• The narrowing gap
• The tragedy of the all-stock deal
• Rio's core business

It's been a while since we last checked in with Rio Tinto. But it's a bellwether that investors should come back to now and then, just to get a sense of where commodities equities are headed.

Like the rest of the market, Rio Tinto has been halved in the stock market's downward slide - down 58% from its closing high of $525.46 on May 22. Even Tuesday's 13% increase is cold comfort compared with the good ole days of spring. So what's the deal?

Shark Still Circling

Well, the deal is still not BHP.

BHP Billiton is still trying to acquire Rio Tinto in a 3.4-to-1 stock deal.

Back in November 2007, when the bid was new (and offered at 3-to-1) Rio Tinto said no on the basis it devalued the company. The International Herald Tribune said at the time:

As the implications of the takeover trickled through the market and investors weighed in, actual stock price ratios changed. Within a couple of weeks the actual ratio of the shares in the market was way over the proposed bid, at 3.3-to-1, forcing BHP to up the bid in February of 2008 to the current 3.4-to-1 offer.

Since then, there's been a steady erosion in the price of both companies, but BHP has managed to retain more value than Rio Tinto. Theoretically this means the deal is sweeter for Rio, but that situation may be shifting again, as in the very short term, Rio shares have been gaining on BHP. These latest market ups and downs have highlighted a real problem with this type of stock-only deal - the constant re-valuation of the deal with every change in stock price.

Last week, Rio Tinto was forced to deny rumors that it was entering actual talks with BHP about its bid, after big unexplained gains in its stock price. That denial (an actual official one) resulted in falling stock prices for both companies, once again changing the deal valuation.

On the regulatory side of the story, the Australian Competition and Consumer Commission (ACCC) released a statement in the beginning of October stating that it was not opposed to BHP's bid to take over Rio Tinto. ACCC Chairman Graeme Samuel said:

South Africa has also approved the takeover bid, provided BHP sells the interest in the Coega Aluminum Smelter project it would acquire in the deal. These kinds of pre-negotiated approvals for hostile takeovers aren't unheard of, but in the realm of corporate warfare, they can often seem a little absurd.

On the other hand, the European Union is still investigating what its position will be on the merger. Japan will reportedly lobby for the EU to block BHP's bid because the two companies supply about 60% of Japan's iron ore, making Japan's steelmakers understandably nervous about increasing costs.