So at long last BHP Billiton is realising its dream deal — a bid for RTZ. Its tough go-getting new CEO, Maurice Kloppers, is hoping to deliver on the long-held ambition of the world’s largest mining company - to get even bigger.
Kloppers has hardly had a chance to warm his seat! He has only been in the top job a mere five weeks. Not a total surprise to the market, however, this move. Given Kloppers’ style and track record his term of office was always likely to be an extremely aggressive one. High risk is to his taste.
BHP was well-known to have had an RTZ game plan for years. Yet, a past CEO head rolled for pushing to use it. One difference is that then BHP may not have been top dog in a merger. Another difference now is perception. China’s growth is accepted as long term and world recognised as increasingly short on resources.
Hence constant rumours that the two might get together. Australian brokers got a strong roll going for their rumour back in May. But, RTZ has always put out denials.
There were those who thought RTZ had won itself some bid protection with its $43bn Alcan takeover. Instead, BHP obviously thought it just made RTZ that much tastier.
Kloppers has developed a taste for deals, it seems. He was a key player in the 2001 merger and integration of BHP and Billiton. The retirement of his predecessor, Chip Goodyear, was regarded as the end of the miners’ regime. Industry comment has been that in BHP’s top team are all deal makers and MBAs!
The mother-of-all-battles promised
Now the mining world is settling into its seats to watch what traders say is promising to be the mother of all battles. It is likely to turn out to be the second biggest ever take-over deal. (So far the biggest has been Vodafone’s $172 bn bid for Mannesman back in 2000.) Big money is on rival bidders appearing soon.
Others circling are said to be Anglo-American and Vale de Rio Doce of Brazil. Given the vital assets involved, Russia or China may push their cash-rich oil majors into the fray. There is speculation that China, especially, may try to block the bid.
Even companies unlikely to be intimately involved got caught up in the merger fever. Just about all the majors saw their shares rise last week.
BHP’s £67bn bid for RTZ last week is just the first move. No one expects the offer of three BHP shares for each RTZ share to succeed. Even a 14% premium on RTZ’s share price at the time looks pretty paltry. "Not even close", was the riposte to the bid coming from the RTZ camp, according to the reports last week!
So, barely was the news out than RTZ’s price shot up from £43.50 bid-price base to just below £53.
At stake is the chance to maximise bargaining power. The prize — holding the cards in dealing with China and India’s seemingly insatiable appetites. Plus, the winning suitor will be scooping up a vast chunk of the whole range of the world’s increasingly scarce minerals.
China is what it is all about
China is said by Kloppers’ watchers to be what it is all about. At his first public appearance as CEO last month, he made it clear that China was the core of his plans. It accounts for around 20% of BHP’s $40bn or so of annual sales already.
As he sees it, China has to grow a robust and affluent economy quickly. Otherwise its existing cities will be swamped as workers flee the countryside. The country would become unmanageable.
The deal is so large that even muted cost savings of merging these two giants are cited in billions. Synergy benefits are put at around US$5 bn.
Gold and diamonds are just bit players on a bigger scene here. The merged group would be a notable player in both. However, their prices have not moved on RTZ news. Not yet, at least.
But this deal is mainly industrial. It is about making BHP the world’s biggest miner of iron ore, copper and aluminium and a major force in coal and zinc. Diamonds are a larger element in the mix than gold.
The governments of China, India and even Japan are undoubtedly very concerned about what a BHP success could do to their already soaring import bills. Iron ore is one huge worry to them. China acquired more than 50% of the world’s traded iron ore last year.
China’s population seems to be at the front of the queues for everything. Diamonds, gold, platinum — you name it, they want it.
Merger could change the whole industry’s scene
Why everyone is watching the outcome is that the merger spin-off could change the whole industry’s scene. If there are problems with the anti-trust regulators then the merged company would have to sell off assets. That would open up routes to growth for others.
But it looks as though there is a long way to go yet. Rio could reject BHP, even if it bids up to the speculators’ favoured level of £100bn. It could go looking for a "white knight." That could bring Anglo America or the Chinese in. The Russians, perhaps? Perhaps not, given their track record for painful bear-hugs.
Bigger is now obviously deemed to be better in mining. So, the other big boys on the block may want to emulate BHP. That could get Xstrata, CVRD, Anglo or Russia’s Norilsk going on competitive moves. Lonmin is a favourite bid candidate for Xstrata in the rumour mills.
So, Isabel and I are settling down to watch the fun. It promises to be better than the soaps!
Keep mining — and watching!
Erin and Isabel
