After a week such as this we are almost hoping that things will quieten down next week. Qantas, the Budget and then rumours of BHP Billiton taking over Rio Tinto. The first two we’ve covered extensively this week, so even though it is tempting to finish the week as we started it, we’ll switch to something almost as exciting but nowhere near as farcical.
Our immediate thoughts yesterday – or was it the day before? – following all the rumours of either BHP or private equity taking out Rio, was whether there had ever been a successful private equity/hedge fund buyout of a resources company on such a scale as Rio Tinto.
We asked around and couldn’t readily think of one, but then that doesn’t necessarily mean there hasn’t been. Doubtless a Reckoner will put your correspondent in his place if there has been.
But is it realistic? A merger between BHP and Rio would probably appear the most likely of the two scenarios. A private equity takeover of either BHP or Rio would probably dwarf the complications that we have seen with the Qantas efforts.
Back to the first question. As Dan Denning noted earlier this week, it all really started going when Citigroup metals and mining analyst Clarke Wilkins put out a research report a week ago under the title, “Could BHPB Bid For RIO?” Within a few days the price of Rio Tinto shares on the ASX had risen from around USD$81 per share to a high point of over USD$99. Just falling short of the century mark.
Citigroup argues that the numbers stack up. The report says, “Given we think BHPB is the most likely bidder of all candidates for RIO, we have run a scenario looking at the impact on the balance sheet and earnings from a bid assuming: Bid premium of 30%; Debt/Scrip funding split of 50/50; 6% cost of debt; USD$500 million in synergies and cost savings.”
Following the release of this report the Rio share price soared, however it wasn’t until Wednesday that the ASX issued a ‘speeding ticket’ to which it received what can only be described as a curt reply effectively denying any knowledge of anything whatsoever.
A merger of these two resources giants wouldn’t be without its objectors, and it wouldn’t be without regulatory hurdles to jump over. However, as unlikely as a merger may be it does seem infinitely more likely than any effort that private equity may make to acquire either Rio Tinto or even less likely BHP Billiton.
We don’t have the space to delve into it in too much detail, but there would seem to be two bumps in the road that private equity would have to negotiate.
The first is that both resources companies are likely to be viewed as economically strategic to Australia. There is also the small matter of the direct or indirect ownership of uranium mines by the two companies. Given the hullabaloo over the takeover bid for Woodside by Shell a few years ago and that over Xstrata’s bid for WMC more recently, a strategic veto by the Foreign Investment Review Board would be a firm favourite.
Second is an extension of the first reason; the company structures of both BHP and Rio. Although many believe that the Australian and London listing of each company represent the same company, the fact is they do not. Although many of the assets are held jointly under both listings, there are some assets which are unique to each business, which may also have an impact on the potential for private equity to easily acquire the companies.
Anyway, we think the market has had a fair share of excitement this week, and although an official announcement of a takeover would round things off nicely, it would be most surprising if anything did happen whether it was now or in the near future.
The Daily Reckoning Australia
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