BHP announces bid for Rio Tinto

Spurned by the board of Rio Tinto (RTP-N, RIO-L, RIO-A) in a friendly approach, BHP Billiton (BHP-N, BLT-L, BHP-A) has made its proposal for a US$138-billion all-share bid public in an attempt to bring Rio into merger discussions.

BHP Billiton is offering three BHP shares for each Rio Tinto, in two share exchange deals that would preserve Rio’s dual-listed-company structure. Under the proposed share exchange, Rio shareholders would have about 41% of the new company, which would still have separately incorporated listed companies in both the United Kingdom and Australia.

There would also be a cash distribution to shareholders of the new company after the merger, via a US$30-billion share buy-back.

BHP is proposing that Australian Rio Tinto shares (in Rio Tinto Limited) be traded for BHP Billiton’s Australian shares (BHP Billiton Limited), and British Rio Tinto shares (Rio Tinto PLC) be traded for a combination of U.K.-domiciled BHP shares (BHP Billiton PLC) and Australian BHP shares. Under the proposed trade ratios, the new dual-listed company would be about equally distributed between holders of British and Australian shares.

The bid values Australian Rio shares at A$127.41 and British Rio shares at 50.28, based on closing prices of 16.28 for BHP Billiton in London and A$42.47 on the Australian Securities Exchange. Taking out Rio PLC’s 37% holding in Rio Limited, the proposal values Rio at US$137.5 billion.

The proposal would need approval from both BHP and Rio shareholders under plans of arrangement, with the domestic share trades in Australia and Britain allowing capital gains rollovers. Any merger would need a sheaf of regulatory approvals, whose receipt would be a condition for the deal to go ahead.

On Nov. 8, BHP confirmed it had approached Rio’s management with a proposal for a friendly takeover. Rio went a couple of steps further in its own release, stating that BHP was offering three BHP Billiton shares for every Rio Tinto share, and that the board had unanimously rejected the offer, in the belief that it “significantly undervalues Rio Tinto and its prospects.”

BHP said that it wrote again to Rio Tinto’s board and that it continues to “seek an opportunity to meet and discuss its proposal.”

The announcement did not actually make an offer for Rio, instead outlining the proposal and BHP’s interpretation of its advantages. The bid is at a premium of about 15% to Rio’s closing prices before the announcement, and would still allow Rio shareholders to participate in the new company.