The Wall Street Journal-20080212-The Investment Case for BHP- Patience May Pay- Rio Tinto Deal Standoff Dents Share Price- for Now- at Least
Return to: The_Wall_Street_Journal-20080212
Full Text (718 words)
Perth, Australia -- Many analysts and investors in Australia think BHP Billiton's bid to create a dominant mining house by taking over rival Rio Tinto makes perfect sense. They believe the two miners are a good fit, particularly in iron ore, which is enjoying buoyant prices due to China's rising demand for steel.
But for investors in BHP, it may be a case of short-term stock- market pain for long-term gain, particularly if the Melbourne-based company has to sweeten its offer further.
Just before the original share-swap offer for Rio was formally unveiled Nov. 12, BHP shares were trading at around 45 Australian dollars (US$40.29). The stock took an initial dive and has been on a roller coaster since. It closed yesterday at A$35.85 in Sydney, down 0.8% from Friday and 25% below its record high of A$47.70 intraday on Oct. 18.
Charlie Aitken, head of institutional dealing at Southern Cross Equities in Sydney, figures a Rio deal will ultimately benefit BHP, which he rates as a "buy" with a 12-month price target of A$45 a share. For the next few months, however, he expects BHP to trade between A$35 and A$40 as hedge funds jockey for position in the takeover play.
Part of the reason is that the deal has reached an impasse. Last week, BHP lifted its all-stock offer, but Rio's board rejected the approach, pressuring BHP to increase sweeteners. And Rio isn't prepared to enter discussions while BHP seeks approval for the bid from antitrust officials in Japan and Europe.
"We could be in a stalemate situation for a long time -- maybe three to six months," Mr. Aitken says, adding that a big question remains over the goals of Aluminum Corp. of China, the government-backed company that teamed up with U.S.-based Alcoa this month to snare a 9% stake in Rio.
China may be seeking an investment "portfolio" of Australian resource companies, Mr. Aitken says. He believes there is a one-in- three chance that a Chinese company may buy a stake in BHP to participate in some of the perceived stock-market upside rooted in the country's huge appetite for raw materials.
If BHP eventually combines with Rio, the result would be a mammoth company with a leading position in iron ore, copper and aluminum.
The next shot in the war of attrition will be fired tomorrow when Rio reports its 2007 results. Analysts expect it to post a US$7.1 billion net profit, down from US$7.4 billion a year earlier. Rio likely will talk up its strong outlook, particularly in iron ore, a sector where BHP has identified large cost savings from a merger.
Yet Rio's board is refusing to enter talks, arguing that the revised offer -- of 3.4 BHP shares for one of Rio's -- still significantly undervalues the company. Yesterday, Rio's share price fell 2.6% to A$121.77. At that level, Rio is trading marginally below BHP's effective bid price.
Some of Rio's Australian shareholders are eager to see the deal proceed. "Clearly there are significant synergy benefits to be had," says Adam Dixon, who helps to manage A$1.2 billion at Ausbil Dexia in Sydney. "As a shareholder in both companies, I want to see those benefits accrue."
Europe and Asia Drop
On Credit-Market Fears
European and Asian markets fell amid concerns that more credit- market thorns lurk and that slowing global economic growth will dent corporate earnings.
Societe Generale said corporate profits could drop 20% on average this year if a recession takes place. "Stocks are unlikely to recover until they have lost substantial ground, and therefore reached very low levels," said Societe Generale in a research note. "Our analysts lead us to believe that we have not reached this point yet."
The pan-European Dow Jones Stoxx 600 Index fell 0.9% to 312.6. Markets in Japan, China and Taiwan were closed for holidays.
In LONDON, the FTSE 100 Index lost 1.3% to 5707.7. Banks and insurers were particularly weak: Alliance & Leicester fell 4.4% and Royal & Sun Alliance lost 4.5%.
In TOKYO, the Nikkei Stock Average of 225 companies remains at 13017.24, down 15% for the year. Market will reopen today.
In PARIS, the CAC-40 Index eased 0.6% to 4682.7. Societe Generale ended down 4% after investors jeered the bank's heavily discounted 5.5 billion euro ($7.98 billion) rights issue.
-- Roundup
