The market is up 35 thanks mainly to BHP’s takeover proposal for RIO. RIO has added 35 points on its own, Fortescue 7 points and NAB 5 points.

The Dow Jones closed down 33 overnight – It moved in a 276 point range and finished lower for the second consecutive session on the back of Ben Bernanke warning business growth could be in trouble. But the big news overnight was Rio Tinto rejecting a takeover proposal from rival BHP Billiton. After having their initial proposal of 3 BHP shares for 1 RIO share proposal rejected, BHP say they plan to continue to pursue RIO in what would be the largest acquisition in history. US listed RIO shares closed up a big 24%. It was a volatile session on Wall Street, the Dow fell as much as 200 points before recovering towards the end of trade and closed down only 0.3% on speculation the Fed might again cut interest rates. Financials recovered, Morgan Stanley finished nearly 5% higher after saying its 4Q profit could be cut by $2.5bn in write-downs related to the credit market but did please investors by issuing a detailed accounting of its exposure to subprime debt, eliminating some uncertainty. The NASDAQ underperformed closing down 1.7%. Cisco reported better-than-expected earnings numbers but the stock fell 4% after disappointing investors with its 2Q outlook.

Resources outperforming, up 2.3% compared to a 0.6% rise in the overall market. BHP down 24c to 4300c and RIO up a big 16% to 13160c. They peaked out at $138.10. At a BHP price of 4324c, the bid is worth $129.72 to RIO which last traded at $113.40. Metals mostly up overnight, Nickel up 1.7%, Zinc up 0.5% and Aluminium 0.3%. Copper down 1.5%. Zinifex up 72c to 1553c. Oil price down 95c to $95.51 after Federal Reserve Chairman Ben Bernanke, appearing before Congress’ Joint Economic Committee with the Fed’s economic forecast, warned investors about the possibility of a slowdown in economic growth. Woodside up 135c to 5515c. Gold closed higher for a 5th straight day, up $4. Newcrest up 30c to 3510c.

The BHP proposal to RIO: BHP announced last night that it had made a takeover approach to RIO’s board. The proposal was 3 BHP shares for every 1 RIO share. Implied RIO price $43.24*3 = $129.72, a 14% premium. A more normal control premium of 25-30% would give you a price of about $147 if the bid went ahead. RIO’s Board has rejected the initial proposal, its shares price were up 24% in the US and 22% in the UK post the announcement while BHP’s shares fell nearly 4% in the US and 6% in the UK. We wait to see if there is an official bid – it seems likely because BHP say they intend “to seek an opportunity to meet and discuss its proposal with RIO” and RIO seem to reject the bid on price not principle. RIO first rallied on bid talk in May this year. Note: there is no official bid, just a rejected proposal and BHP say “There can be no assurance that any transaction or offer will result from BHP’s proposal”. There could be regulatory issues. You have to wonder what BHP will do if they continue to reject their approach. They may draw the line at a hostile bid. Some suggestion that they will struggle to make a cash bid or add a cash element to the bid in the current credit markets. Also talk that a combined RIO and BHP will be forced to sell assets to the benefit of other iron ore players CVRD and Fortescue Metals.

In other news…

  • Fortescue Metals up 15% to 5129c on the back of the BHP bid for RIO. The bid is a huge endorsement of the iron more price cycle and the same message as that delivered by Xstrata in last week’s $3.1bn bid for Jubilee Mines. FMG have also had an OK run-of-the-mill AGM today.
  • NAB’s final results are out. They are good. Better than expected. The company themselves call them “strong” and they are very positive on the outlook. Costs better than expected…minimal cost growth against revenue up 8.3%. Dividend at 95c is better than the 91-93c expected. H2 cash earnings up 20% on the back of impressive growth in borrowing. NAB outperforming, up 1.5% to 4283c.
  • Lion Nathan (LNN) announced yesterday they will buy J. Boag & Son from San Miguel for around $325m. The research this suggests that the deal makes sense and is in the best interest of LNN shareholders. ABN AMRO say the move is strategically and operationally sound and value enhancing. They maintain their Hold recommendation and 835c target price. LNN down 2c to 877c.
  • David Jones (DJS) impressed with their sales numbers yesterday. UBS have upped their recommendation to Buy from Neutral this morning after DJS’s 6.7% like-for-like growth exceeded their expectations of 5%. They have a 530c target price. DJS up 2.5% or 12c to 492c. Merrill Lynch has a BUY recommendation and a 600c target price. Goldman Sachs JB Were has a HOLD and a 514c target price.
  • ABN AMRO are a little worried about ABC Learning (ABS) reaching its FY EPS growth target of 20% because of the stronger Aussie dollar. They maintained their Buy recommendation but did cut their target price to 765c from 825c. CEO Eddy Groves in on the cover of this weeks BRW magazine with an interview inside. Its shares are down 3c today to 601c, a new 52 year low.
  • Companies going ex-dividend today include: BOQ (37c), MRN and MTD.

Week aheadOrica results on Monday (should be good with profit up 25% with a 53c dividend which won’t be fully franked – PE 32x falling to 20x. Yield 3.4%). Wesfarmers starts trading including Coles and moves from the 18th to the 8th biggest stock on the market. Macquarie Bank interims on Wednesday. AGMs from IAG, SEV and WES.

In the MARCUS TODAY newsletter today we have write ups on Bernanke, NAB and the BHP/RIO bid with preferred stocks listed for the resources sector. We also list the cheapest stocks and the highest yielding stocks in the ASX 200.

THE MORNING MARKET REPORT is provided by the MARCUS TODAY daily stockmarket newsletter. You can subscribe for a free five day trial here.

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