How desperate is BHP Billiton to get its Rio Tinto bid up? There was a flood of leaks and tips from the BHP camp to weekend papers in London about all sorts of deals and moves.

But the question put to BHP on Friday night by the markets was pretty tough.

The Aussie dollar dropped around 2 US cents, from 92.85 USc in Sydney on Friday afternoon, to around just under 91 USc at the close of trading early Saturday morning in the US. It’s weakened further to around 90.38 USc this morning in Australia.

That fall: 4% against the yen, with half that coming in five minutes on late Friday night as the yen climbed to an 18 month high against the greenback (higher than during the August credit crunch), saw the Aussie dollar value of BHP and Rio shares listed in London knocked down heavily.

Driving that fall is the rising level of uncertainty in financial markets about the health of US banks, and some big British banks. If this develops in a full blown panic like we saw in August, then the BHP bid will be stopped in its tracks.

The fall in the value of the Aussie dollar came as reports surfaced in London of the BHP bid getting a $US70 billion cash injection from the troubled Citigroup bank to give it the firepower to launch a hostile cash and share offer if it has to.

London’s Sunday Times claimed at the weekend that a price of $US146 for Rio shares, a premium of 61% to the Rio price before the bid, might be a winner.

And the same paper claimed that BHP was thinking of selling its oil and gas business for more than $A65 billion to help fund the cash component of the offer. Chinese buyers were being approached, the report claimed, by Goldman sachs and Citigroup, its advisers.

But despite the leaks and spin, investors would do better to keep a close eye on what’s happening in the US banking and finance markets where there’s increasing nervousness about the health of some big players.

The big British bank, Barclays, was at the centre of more worries on Friday and is now working with its auditors to try and convince markets and investors that it is healthy. Barclays would have to be part of any big banking group funding that $US70 billion cash standby.

BHP’s choice of Citigroup as one of its advisers is a gamble: the big US bank is leaderless having shed its chairman and CEO over billions of dollars of subprime and other losses and faces the prospect of coming under pressure to be broken up and sold off.

Its capital ratios are falling because of the losses and US bank analysts question its ability to maintain dividends and repair the capital destroyed by its subprime adventures.

The ability of Citigroup, Goldman Sachs and others to raise $US70 billion in cash is open to question because of the gloom in markets: deals are being done but all the big investors have pulled back and even a highly profitable company like BHP would have to pay high rates for that much money.

That’s why the sale of a major asset could be on the cards as an easier way to raise the cash.

Certainly Citigroup could not finance a cash raising: six months ago it might have been able to do a deal like that, now it needs friends and every major bank is back to being suspicious about each other’s balance sheet and asset profile.

Citigroup could lose another $US11 billion or around a quarter of the reported $US43 billion of subprime linked securities and loans on its books. As well, it has around $US8 billion in back up funding extended to a group of off balance sheet funding vehicles also invested in these dodgy securities.

The value of the Aussie dollar fell sharply Friday night from the Friday close here of 92.85USc to under 91 US by the end of trading in New York because of the surge by the yen to an 18 month high.

The Aussie dollar shed ground against sterling and as a result of the changes the value of BHP’s opening offer terms of three of its shares for every one Rio fell.

The sharp rise in the value of the yen, a very sharp fall in US 10 year bond yields to around 4.23% and more instability in US stockmarkets and banks, were major factors in sending currency values reversing themselves in a few tense hours.

The yen ended 1.7% up against the US currency, which was virtually steady against the euro as traders worried about those denied reports that Barclays would take huge losses on subprime mortgages and other dodgy securities.

At one stage Friday night the Australian dollar shed 2% in value against the yen in five minutes. It finished down just over 4% on the night at 99 yen to the dollar from 104.60 in Sydney earlier in the day.

The impact of the currencies’ big moves can be seen from comparing the closing price of BHP and Rio shares in Australia and London on Friday.

BHP shares fell in London Friday night our time after dropping 77c in Australian trading to $42.47: that was a fall of 5.62% last week.

BHP shares fell to 16.28 pounds, or $37.33, a big difference to the Australian close a few hours early of $42.47, but accounted for by the fall in the value of the Aussie dollar on Friday night against sterling and the 1.7% fall in the sterling price.

Rio shares rose 6% in London to 56.24 pounds or $128.97, compared to the Australian close of $130.90.

The offer valued Rio shares at $127.41 at Friday’s close in Sydney for BHP of $42.47. But based on London closing value for BHP shares, Rio shares were valued at $112. Its early days but the sharp fall does illustrate the need for BHP to put some cash into the bid.

The cash though will bring some credibility to the paper offer, but BHP will have to reveal terms for a possible cash and share offer to put some stability into its own and the Rio share prices.

If the shares maintain current values, BHP could have to throw in up to $A40 a Rio share or more to make it real. But BHP has a problem: falling debt levels and no way of spending its enormous annual cash flows of more than $16 billion a year. Analysts say that if BHP doesn’t make a big takeover it could be debt free with no gearing by the end of 2009-early 2010.

Its major spending commitment will be the expansion of Olympic Dam in South Australia that could cost $8 billion.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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