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BHP Billiton launches formal $147.4b hostile Rio Tinto takeover

After weeks of road shows and media campaigns, BHP Billiton Wednesday finally officially launched the second biggest takeover in corporate history, offering $147.4 billion for mining rival Rio Tinto.

BHP Billiton Ltd/Plc launched a hostile $147.4 billion bid for mining rival Rio Tinto Ltd/Plc on Wednesday, in what could be the second biggest takeover in corporate history.

A marriage of the two mining giants would create the world's third-richest company, with a market capitalisation eclipsed only by Exxon Mobil and General Electric.

It would also create a company that dominates world supplies of dozens of key minerals, raising concerns among industrial buyers from Europe to China that one company would have too much clout on pricing.

BHP sweetened its initial approach by 13 percent, offering 3.4 of its shares for every Rio share. In November, it offered three shares for one, but failed to persuade the Rio board to agree to a friendly merger.

"The Rio Tinto shareholders will now decide," BHP Chief Executive Marius Kloppers said.

BHP, which posted a 2.4 percent drop in first-half profit to $6.017 billion, needs at least 50 percent of holders of Rio's Australian and London shares to accept.

"This is our first and only offer," Kloppers told a briefing, though he later would not say if that meant it was the final one.

"I think it's closing a door that shouldn't have been closed," said Ken West, a partner in Perennial Growth Management.

Rio was trading at a share ratio to BHP close to the offer, suggesting investors were betting Kloppers would stick with 3.4 shares for one.

Some analysts were sceptical the bid would be successful.

"Given our market conditions and the outlook, if you look at comparative mergers and acquisitions, it probably is not going to get there," said Perennial's West.

Kloppers said the Rio board refused to discuss a merger before making the offer, but believed the offer still held widespread support among Rio shareholders, 60-70 percent of whom also hold BHP shares.

As an added incentive, Kloppers promised a $30 billion share buyback if the deal goes through. BHP said Rio shareholders would hold 44 percent of a merged entity, compared with 36 percent in last year's initial approach.

The offer equates to a 45 percent premium to Rio's stock price in November before BHP first raised the idea of a union.

"It's a lot fairer than the offer we've had before. It's by no means a knock-out offer," said Bertie Thomson, a fund manager at Aberdeen Asset Management, who holds both Rio and BHP shares.


Rio said in a statement it was considering the offer and advised its shareholders not to take any action.

Rio Chief Executive Tom Albanese had called the initial BHP proposal "dead in the water" and "ballparks away" from a realistic offer.

Shares in BHP fell 5.8 percent to A$37.36 by midday, while Rio rose 1.5 percent to A$129.20.

Rio Tinto has long opposed BHP's overtures, arguing it was better off as an independent company, digging its own iron ore mines and churning out hundreds of thousands of tonnes of copper, zinc and aluminium.

Key customers for both companies, particularly steel mills in China and Japan, which buy hundreds of millions of tonnes of iron ore each year, have raised concerns about the potential dominance of a merged group.

"The offer should be enough to get BHP talking to Rio," said Rob Patterson, managing director of fund manager Argo Investments. "We think to raise the offer to that degree probably makes sense."

BHP's designs on Rio hit a speed bump when Aluminum Corp of China (Chinalco) teamed up with Alcoa Inc to buy up $14 billion worth of Rio stock, giving it just over 9 percent of the company, the single largest shareholding.

Chinalco and Alcoa have said they have no plans to raise the stake further and Kloppers said the share raid was "just another factor" to contend with. Chinalco said on Wednesday it had no plans to commment on the bid. Alcoa said it was studying the bid.

The Hong Kong-listed shares of Chinalco's Chalco unit fell more than 9 percent on Wednesday after BHP sweetened its Rio offer.

Ratings agency Standard & Poors said late on Tuesday it put Chalco on creditwatch negative amid concern that Chinalco's large debt burden could pressure Chalco's financial profile.

Analysts said the Chinese were unlikely to sit on their hands.

"Why does BHP really want to tempt the dragon? Chinalco has already made the message clear: they really do not want to see a merger," said Geoffrey Cheng, director of equity research at Daiwa Institute of Research (H.K.) Ltd. "You're not going against a corporation. You're going against a nation."

A BHP/Rio deal would be the latest in a wave of big mining houses scooping up rivals to cash in on strong demand for minerals across Asia and elsewhere.

In 2006, Brazil's Vale bought Canada's Inco for $17 billion, paid for with a revenue boost stemming from high world iron ore prices.

Vale has also said it was in talks with Anglo-Swiss rival Xstrata about a takeover, a deal that analysts calculate could top $100 billion.

Rio swooped in to pay $38 billion last November for Canada's Alcan, trumping an offer of $27 billion from Alcoa to become the world's largest aluminium producer.

BHP earlier said it faced significantly higher input costs and unfavourable foreign exchange movements during the first half, although underlying earnings before interest and tax rose 5.4 percent to $9.6 billion.

The group posted record half-year results in iron ore, petroleum and manganese, and increased its interim dividend by 45 percent to 29 cents a share.

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