Rio's Defense Could Lead To Counteroffer For BHP

 

British mining giant Rio Tinto, fighting off an unsolicited $131.57 billion takeover bid from Australian rival BHP Billiton, is considering turning the tables in a so-called Pac-man defense and launching a counterbid for BHP, according to people close to the matter.

 

Rio Tinto is still formulating its defense after BHP proposed an all-stock acquisition earlier this month -- in what would be one of the biggest deals ever. Rio rejected the proposed bid as too low. A combined BHP and Rio, the No. 1 and No. 3 mining companies, respectively, would be sweeping in its global reach with operations on six continents and a leading market share in iron ore, copper, aluminium and other vital natural resources.

 

Rio, based in London, plans to outline its defense at an already scheduled day of investor meetings Nov. 26, these people said. The crux of the presentation will focus on the relative value of Rio's assets compared with those of BHP's. The two companies operate mines close to one another in many parts of the world, including North America, Africa and Australia.

 

BHP, based in Melbourne, Australia, is pressing ahead and this week set out on a global tour to meet with shareholders to ask for support in combining the two miners.

 

Rio is considering a broad array of potential options, including selling assets and other moves that could increase value for shareholders, people involved in the discussion say. So far the defense doesn't include the participation of any Chinese entities. China is BHP's largest customer and a top buyer for Rio's products.

 

Rio hasn't finalized its defense plan, and a potential Pac-man bid is only being studied, these people said.

 

Rio's defense is being led by a special board committee headed by company Chairman Paul Skinner and which includes nonexecutive director David Mayhew, one of London's most prominent investment bankers, who heads J.P. Morgan Cazenove, a joint venture between J.P. Morgan Chase & Co. and Cazenove Group.

 

Pac-man defenses are rare and risky. Coined after a video game in which the pursued character can turn and eat its attackers, it was first used in 1982 by Thomas Pownall, former chairman and chief executive of Martin Marietta Corp., who successfully fought off an attempted takeover by Bendix Crop.

 

Typically the defense fails. French oil company ElfAquitaine turned on its Franco-Belgian suitor TotalFina in 1999, but lost and was acquired by TotalFina. More recently the tactic was used in the music industry when EMI Group PLC of the U.K. and Warner Music Group Corp. each bid for the other. Both deals failed for regulatory reasons, and EMI was later purchased by a private-equity firm.

 

Convincing its shareholders that instead of receiving a premium for their stock, Rio should pay a premium to BHP holders is something that would receive support only if Rio's management was considered superior to BHP's, and able to extract more cost savings and other synergies from a combination. Both companies are the product of large-scale mergers.

 

Rio is known as a conservative operator, while BHP has been more aggressive at investing money into large and complicated projects, with mixed results. A counterbid by Rio for BHP would lead to a clash between the companies, each citing cost overruns and history of bungled investments by the other.

 

The two companies held preliminary merger talks earlier this year, according to people close to the matter, but the talks foundered. Rio then purchased Alcan for $40 billion, and BHP made its unsolicited proposal days before the Alcan deal closed.

 

At the center of such a merger would likely be BHP's petroleum arm, a unit that some shareholders have said doesn't fit in the company. Rio could bid for BHP and agree to sell the oil business, honing the combined company into a global mining concern with complementary and neatly overlapping businesses.

 

Rio shares fell 2.1% in Sydney and dropped 1.9% in London. BHP shares fell in 2.5% in Sydney and declined 1.2% in London. Rio's London-listed shares closed trading in London 10% higher than the value of BHP's stock-swap proposal, suggesting investors expect a higher price from BHP.