BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

The Organization for Economic Co-operation and Development (OECD) in Paris has just released their Composite Leading Indicators (CLI) for the major economies. Despite the dry economic analysis, one can read some very interesting predictions. I should start here by defining CLI as a qualitative rather than quantitative measure of the trends in an economy. A CLI above the long term average of 100 suggests an economy on a growth trend. Below 100 suggests an economy on a slowdown. It can be more subtle than that but for our purposes we are looking at the medium term trend rather then month to month implications. (more…)

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