Mining giant BHP Billiton has increased its hostile bid for Rio Tinto with a 3.4 for one share swap. But its falling share price today has already devalued the offer.
BHP's increased offer – equal to £74.8 billion - valued Rio's shares at £54.30 each at Tuesday's market close. This is considerably less than the £60 per share paid last week by Chinese mining group Chinalco and aluminium giant Alcoa for a 12% stake in Rio.
Shares in BHP had fallen more than 8% on Wednesday morning as the City questioned its ability to fight off Chinese competition and secure Rio. This implies an offer of just £51.57 per share against Rio's trading price of £54.32 today.
BHP initially offer three of its shares for every one Rio holding. If successful, it would be the second largest takeover deal after Vodafone's purchase of Mannesmann in 1999.
Chief executive Marius Kloppers said the deal relied on 50% approval from shareholders and regulatory approval in multiple territories including Australia, the US and Europe.
He said the proposed merger would deliver efficiency benefits worth £1.9 billion a year and raise the value of shareholdings in both companies.
Rio Tinto said it would consider the new terms but advised shareholders not to take any action in the interim.
Stockbroker Numis doesn't believe the Chinese want to own Rio outright. 'We continue to believe the Chinese are not looking to bid for Rio Tinto and would meet resistance from the Australian government if they attempted it,' said analyst Simon Toyne.
'With Alcoa’s involvement, which could become greater, combined with Chinese interest and a confirmed bid from BHP Billiton, an eventual break up of Rio Tinto appears possible (though we believe the Chinese’ main objective is to prevent BHP and Rio acquiring) but the process from here will be drawn out, taking most of 2008 in our view.'
John Meyer, head of resources at investment house Fairfax said the revised terms may not be enough to convince institutional funds to accept to offer. 'Many shares are owned by institutions that hold both stocks and would continue to prefer to hold these stocks individually,' he added.
