The Melbourne Cup is the biggest event in Australia’s calendar, a week-long
orgy of betting, boozing and barbecues that unites the nation and attracts
half a million people to the Flemington racecourse.
But last week’s event risked being overshadowed, for once, by a business deal.
On Thursday, two days after Efficient, a New Zealand-bred horse, romped home
to win the cup, BHP Billiton, the Australian mining group, announced an
audacious £67 billion bid to buy rival Rio Tinto.
Such a takeover would create one of the world’s largest companies, a
natural-resources behemoth worth more than £170 billion. It would be an
Australian champion, a group with a stranglehold on supplying the raw
materials that fuel the world economy. It would have big shares of the
aluminium, diamond, silver and copper markets and, most importantly,
one-third of the world’s iron-ore supplies.
As the two groups supply most of the iron ore needed to keep China’s steel
mills running, it would have its foot on Beijing’s throat.
The first shots, fittingly, were fired in Melbourne. Paul Skinner, 62, Rio’s
softly-spoken British chairman, was on a business trip there on November 1,
four days before the running of the cup. He took an unexpected call from his
opposite number at BHP, Don Argus.
Argus, a brash, 69-year-old Australian with an apposite nickname – “Don’t
Argue” – told Skinner there was a letter on its way. It contained a takeover
proposal, something the pair had talked about tentatively over several years
but never properly explored.
This time it was different. BHP had been doing its home-work and thought it
could overcome the objections of competition watchdogs around the world.
There had also been a change at the top. Marius Kloppers, a South African BHP
veteran, had taken over as chief executive a month earlier. He was keen to
get the deal done. After exploring joint bids for Rio in collaboration with
rivals Xstrata, Anglo and Chinese investors, BHP decided to go it alone. “It
has been obvious for years that the two companies fit together, but plans
for joint ventures and mergers have gone nowhere. That’s why we decided to
go for a takeover,” said one of Kloppers’s closest advisers.
Kloppers’s predecessor, Chip Goodyear, had taken a more measured approach.
Brian Gil-bertson, the chief executive before him, had his plans for Rio
thwarted, ironically, by Argus.
Both companies wanted to keep the talks quiet. But on Wednesday, with Rio
pushing BHP to deliver a firm offer, their share prices began to move,
indicating traders had got wind of the negotiations.
On Thursday BHP went public, making a statement to the stock exchanges in
London and Sydney. It offered three of its shares for each Rio share –
roughly a 14% premium to Rio’s closing share price on Wednesday of £43.50.
Rio’s shares took off, jumping 22% on the day. It rejected the offer, saying
it “significantly undervalued” the group. Rio shares closed the week at
£56.24, BHP at £16.28.
This weekend BHP directors are holding a series of meetings with their
advisers – the investment banks Goldman Sachs, Citi and HSBC – with some
insiders predicting a formal, and possibly hostile, offer this week. Rio
will fight hard, with chief executive Tom Alabanese embarking on a City
charm offensive to highlight the group’s potential. It is also
understood to have told BHP it wants £70 a share. IN November 1952, Lang
Hancock, a farmer and part-time prospector, was flying across a remote part
of western Australia. The weather was turning bad and, fearful of losing his
way, he dived down to follow the Turner river valley.
As the gorge walls flicked by, Hancock was struck by the red colour of the
rocks. “I noticed that the walls seemed to be solid iron and was
particularly alerted by the rusty looking colour of it,” he said.
He had chanced upon what is probably the world’s largest iron-ore deposit.
Returning with a prospector pal he mapped with ease a single lode 112km long.
The Pilbara region of Western Australia where Hancock struck it rich now forms
the core of the BHP-Rio deal. In hot and dusty towns like Newman and Tom
Price, miners labour round the clock in gargantuan open-cast mines producing
hundreds of millions of tonnes of iron ore a year.
The sheer scale of the operation is mind-boggling. The world’s biggest trucks –
three-storey tall giants made by Caterpillar and Terex that carry 350 tonnes
in a single load – look like matchbox toys creeping around the terraced
pits.
Nearly all of Pilbara’s production goes to Asia, and most of that to one
insatiable customer, China, which has little domestic iron ore. Last year
its steel mills chomped through 326m tonnes of imported ore, most of it from
Australia.
But it is not enough. Despite Australia’s best efforts to ramp up production,
with a fifth rail line to Port Hedland, the region’s main harbour, under
construction, and new jetties and ramps under way, China wants more. At any
time over most of the past year, more than 50 ore carriers have bobbed at
anchor off the port, waiting their turn to carry off the precious material.
This shortage of supply has already taken its toll on prices. Iron-ore prices
are set once a year. The contract rate is now about $100 a tonne, while the
spot rate has soared to $150. The annual price negotiations began recently,
with most predicting an increase of at least $25 a tonne for next year. If
the takeover goes ahead, BHP-Rio will control 36% of the world’s iron-ore
production. CVRD of Brazil will control another third.
IRON-ORE BUYERS are not likely to be pleased. “This is not a situation that
steel producers will like,” said Jay Hambro, chief executive of Aricom, a
quoted mining group with iron-ore projects in Russia.
Another steel-industry executive said: “There will be widespread opposition
to this, not just from steel producers themselves, but also from their big
customers, like carmakers. The European Union will definitely want to step
in.”
China’s attitude is crucial. The Sunday Times understands – although sources
close to BHP reject the suggestion – that the company has already sounded
out Beijing about the deal. Talks have been held with China Development
Bank, the agency responsible for developing the national economic plan,
about a supply deal from the Australian mines.
This weekend, however, Rio is trying to steal back the initiative. It will use
the next few weeks to remind shareholders of the immense value of its
operations across the globe, and, if BHP does go hostile, Rio will not be
short of interested rival suitors.
The battle for control of a large chunk of the world’s mineral wealth has just
begun.
HOW THEY COMPARE
BHP BILLITON
Formed from the 2001 merger of Australia’s BHP and South Africa’s Billiton, it
is the world’s biggest mining company. It has an unusual corporate
structure, with stock-market listings in London and Australia.
Market value: £98 billion
Operating profit: £7 billion
Turnover:£24 billion
Staff:39,000
Market share:iron ore 14%, coking coal 19%, copper 8%, aluminium 7%
RIO TINTO
Rio’s roots lie in a company formed in London in 1873 to fund copper
production at Rio Tinto in southern Spain. Like BHP, it is listed in London
and Australia. It has just bought Alcan, a top aluminium producer.
Market value: £77 billion
Operating profit: £7.8 billion (inc Alcan)
Turnover:£23 billion
Staff:35,000
Market share:iron ore 22%, coking coal 3%, copper 5%, aluminium 2.3%
