BHP's statement on its offer for Rio

BHP's interim results in full

Rio Tinto's board has unanimously rejected BHP Billiton's improved £70 billion offer for the mining group after "careful consideration, on the basis that it still undervalues the company.

The group's rejection is just the latest move in the battle for control of Rio which dramatically intensified last night when BHP launched a hostile offer worth 3.4 of BHP’s shares for every one of Rio’s.

The deal values Rio at £54.29 a share, just 5p below its closing price yesterday, but way below the £60 a share that Chinalco, the Chinese aluminium producer, and Alcoa paid for a a 9 per cent stake in Rio last week.

Rio Tinto's Chairman, Paul Skinner said: "BHP Billiton's offers, while improved, still fail to recognise the underlying value of Rio Tinto's quality 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 said today it has raised $55 billion from banks to finance its acquisition of Rio. The money will be used to fund a $30 billion share buyback once the deal is completed and there remainder will refinance Rio's existing borrowing.

However, BHP's bid and a potential counter offer from Chinese companies and the Chinese Government, which owns a vast $200 billion sovereign wealth fund, may be blocked by Japan’s aggressive anti-trust watchdog which has started talks with its European counterparts aimed at stopping the £70 billion deal, The Times has learned.

Industry insiders say the Japan Fair Trade Commission (JFTC) is addressing fears among local businesses they will lose their bargaining power if Rio and BHP combine to create a mining giant with a 70 per cent share of the world's iron ore market.

On the other hand, there is also unease that the Chinese Government will gain control of Rio Tinto, which in turn controls 24 per cent of the world's iron ore market, after Chinalco and Alcoa invested in Rio last week.

Chinalco and Alcoa spent $14 billion (£7 billion) on their joint stake in Rio, effectively setting a benchmark price for the world’s second-largest miner.

Kazuhiko Takeshima, the chairman of the JFTC, told The Times in a recent interview that the issue of an iron ore mega-merger and a possible joint response by several anti-monopoly regulators had already been raised between Japan, the European Union and individual European watchdogs.

Hajime Bada, the president of the Japan Iron and Steel Federation, said earlier today that Japanese steelmakers were now faced with two “undesirable” situations. Neither a merger of BHP and Rio nor the emergence of a more globally powerful Chinese iron ore player would be good for Japan, he said.

Sources close to Chinalco had earlier said that it was likely that China would intervene and counterbid if BHP raised its offer, although observers said that it could face regulatory hurdles. The Chinese are already seeking approval in Australia to raise their holding to 19.9 per cent and may go further to ensure that BHP is blocked.

In a message to Rio shareholders, BHP said that its offer was a one-off and would unlock value in both companies. It said that its offer would become unconditional once 50 per cent of Rio shareholders accepted it.

Sources said that BHP’s tactic was to try to build early momentum for its offer and prevent its investors from sitting on the fence waiting for the Chinese to counterbid.

Marius Kloppers, BHP’s chief executive, said that the 3.4 for 1 offer represented a 45 per cent increase on the value of Rio’s shares before his initial approach last November. Under last night’s offer Rio shareholders would own 44 per cent of the combined company.

In a discussion with investors on Wednesday morning, Mr Kloppers defended his offer by insisting that Rio’s share price had only risen because of his approach.

He said that Rio’s shares had, on average, traded at a multiple of 2.7 times BHP’s price during 2007. BHP’s current offer is at a multiple of 3.4.

The BHP boss also said that Chinalco’s acquisition of Rio shares at £60 each should not be considered a value precedent.

He said: “The £60 paid by Chinalco does not set a benchmark, it was the price the Chinese had to pay to get those shareholders to sell. They sold at a premium because they were selling their stake in future returns. Were it not for the BHP offer there would have been no uplift in Rio’s share price. It is our view that the underlying principles of Rio Tinto do not support their current price.”

Mr Kloppers added that the Chinalco share raid last Friday was an “interesting development” but insisted that it did not change BHP’s “compelling value proposition”.

“We regard the Chinalco move with interest but not surprise. Despite speculation over its motive they have described the investment as strategic in character but it does imply a positive view of the sector,” he said.

Rio’s board rejected the first approach claiming that it undervalued the company.

If successful, BHP’s bid would create a natural resources giant worth more than $300 billion with leading positions in iron ore, copper, aluminium, coal and uranium. The deal would also be the second-largest takeover after Vodafone’s acquisition of Mannesmann in 1999.

Sources have said that China had decided to make its move because it could not tolerate a combined BHP-Rio having a stranglehold on the global iron ore market.

China is one of the world’s biggest consumers of iron ore, which it uses to manufacture goods and materials that drive its booming economy.

A source close to Chinalco said: “They are not going to sit back and let that happen. BHP has to see that its largest customer has a limitless amount of money and this is a matter of the highest political importance for China.”

Mr Kloppers believes that a combined BHP-Rio would unlock massive cost savings as the group could pool assets, particularly at their iron ore mines in the Pilbara region of Australia.

These mines supply China with the bulk of the country’s iron ore – the raw material used to make steel.

BHP is also offering shareholders another sweetener as it will launch a $30 billion share buyback if the takeover is successful.

Mr Kloppers said: “This is a unique opportunity to unlock value. We are offering very competitive terms to Rio Tinto shareholders, but the deal will also be value-enhancing for existing BHP shareholders.”

As it announced its offer, BHP also released its results for the six months to the end of December. Its revenues rose by 15.5 per cent to about $25.5 billion and underlying profits were up by 5.4 per cent to $9.6 billion.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive