Baosteel Bids Up Rio Tinto in an Attempt to Kill BHP Bid

Do you think this is what Marius Kloppers had in mind? Ever since he made his ambitious bid for Rio Tinto (ASX:RIO) on behalf of BHP Billiton (ASX:BHP), everyone seems to have concluded Rio is the better stock, with better assets, and better growth prospects (at least when it comes to the hematite ore in the Pilbara). Rio just keeps getting more expensive while a merger looks more and more complicated.

And now, along comes the President of China's largest steel maker, Baosteel. It's the sixth largest steel marker in the world. It's also owned by the State, which happens to have US$1.4 trillion in US dollar reserves and a US$200 billion sovereign wealth fund. This fund exists to invest China's forex reserves in new assets, like Rio.

Baosteel's president Xu Lejiang told China's 21st Century Business Herald that his firm (and his country) haven't decided whether to counter BHP's bid with one of their own. "We are still studying the plan and are discussing how to launch a bid. If you ask how strong the possibility is, it's quite strong. But of course, there are other possible responses as well."

Hm. What other responses?

If we were a gambling man, we'd call Baosteel's bluff. He's bidding up Rio beyond what BHP is willing to pay. How can we be so sure?

Mr. Xu also said, "I'm afraid US$200 billion won't be enough," he said. One way to kill the merger is to ramp up Rio's share price so high (by talking up a counter offer) that BHP backs off. Of course, the intention to make an offer could be sincere. Why wouldn't Chinese firms take equity stakes in Australian ore companies? It makes perfect sense.

Dan Denning
The Daily Reckoning Australia

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