Saturday, November 10, 2007

How to play the potential merger of BHP Billiton and Rio Tinto

From the National Post:

...While Mr. Lancaster points to the obvious arbitrage play of going long RIO and short BHP, he says BHP looks more fundamentally attractive given RIO’s recent run-up.He rates BHP at “outperform” with a price target of £20 or A$50. RIO is also rated “outperform,” but the analyst upped his target from £43 or A$107.50 to £56 or A$140 by incorporating a 30% takeover premium....

From the Financial Times Alphaville blog:
BHP prepares to go hostile - financing arranged through Citi

Yes, the stock market has been reading the Rio Tinto / BHP Billiton situation correctly. Word reaches FT Alphaville that BHP, using Citi, has arranged a $70bn line of financing.

Clearly, the Anglo-Australian miner is going hostile in the pursuit of its smaller rival. And there is going to be a substantial cash element to its next offer.

Pedigree City sources say that BHP - egged on by Goldman Sachs - has actually been preparing an aggressive move since Rio politely declined its advances last weekend. Its provisional timetable pointed to a hostile move a fortnight after the initial approach, but the enthusiasm of those pushing Rio’s share price another six per cent higher on Friday may well have accelerated BHP’s planning.

Either way, people intimately involved in this mining matter expect the whole thing to go 100 per cent political by Monday. Think in terms of diplomatic incidents.

Why? Because the Chinese government will treat it as an attempt to create an effective monopoly in the supply of iron ore.