Tuesday, December 4, 2007

BHP/ Rio Tinto

The BHP/Rio Tinto saga is complicated but important. Its important because it involves nothing less than control of a large chunk of the worlds active mines excavating iron ore, copper, coal, and a variety of other minerals.

Its complicated because the word "control" in the above sentence has both a corporate and a national significance, and because the laws of several different nations will play a part in helping determine this.

A little less than a month ago, on November 8, BHP Billiton announced a bid for control of Rio Tinto. In a sense there would be four companies involved in any such acquisition because both Rio and BHP have a dual identity: each is both a British and an Australian corporation -- with separate sets of shareholders but with only one board of directors and managerial structure.

BHP is the larger of the two, but Rio has the more illustrious history. It began with Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.

The dual national nature of the company came about in the 1960s, when BHP bought a majority stake in the Aussie firm Consolidated Zinc.

But, to the point: the board of directors of Rio has resisted BHP's offer, claiming that it significantly undervalues the company.

It is often the case that when the directors of a target company resist such an overture, they realize and accept the fact that they are "in play," they their days as an autonomous operation are nearing an end, but their looking for a "white knight," a friendlier company willing to make a higher bid for the damsel.

The government of China, and corporations it sponsors, may be about to put on the white shining armor in this scenario. China Investment Corp. has US$200 billion at its disposal. Yet so large is the scale of Rio's assets and prospects that there is also talk that by the time the auction is over, that might not be enough.

There's much more that might be said about this matter, but I've just offered you a score card -- or at least sketched the outlines of the score card -- for what may be a long game. We'll see how it fills in.

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