The BHP-Billiton board has ignored Chinese concern and passionate pleas for restraint — such as this one from Alan Kohler — and gone ahead with its hostile takeover bid for Rio Tinto.

Marius Kloppers, the 44-year-old South African vegetarian, managed to get unanimous support from BHP’s board — which only has a minority four Australians — to launch what will undoubtedly be one of the most controversial takeover battles in this globalised world.

After an opening gambit of three shares for one and then a $15.5 billion Chinese cash raid at the then rate of four shares to one, BHP-Billiton has formally offered 3.4 of its shares for each Rio Tinto share, which is a huge 45% premium to the pre-bid Rio share price.

The following deluge of information hit the market before trading began this morning:

Many in the market were expecting BHP would walk away but the bid wasn’t excessively generous so BHP shares only fell $1.90 to $37.75 this morning and Rio Tinto gained $1.60 to $128.95 – marginally below the effective $132 a share paid by the Chinese government.

The structure of the all-scrip offer is quite clever because it is only conditional on getting 50.1% of the shares. This could well leave the Chinese Government as a minority shareholder in a still-listed Rio Tinto with no board representation and a gorilla to deal with on supply deals.

The Chinese bought their stake in Rio Tinto PLC but is reportedly asking FIRB for permission to buy more shares. They’ll need to do precisely that if BHP is going to be prevented from getting control of Rio Tinto – with or without the backing of Rio’s board, which only has three Australians out of 15.

The dual listed company structure of both BHP and Rio Tinto will make this the most complex takeover in history. Tax will be a big factor in this deal. It’s an all scrip offer but Rio Tinto PLC shareholders will only get rollover relief if 80% accept, whilst Rio Tinto Ltd shareholders will get tax relief if compulsory acquisition is reached at 90%.

Rio Tinto is only 15% Australian owned but don’t be surprised if the Australian shareholders flood the offer, appreciating the creation of the first Australian-based mega-corporation, running more than $200 billion worth of local resource projects.

However, there are numerous regulatory hurdles to clear first, the biggest of which is the competition issues in the Pilbara, which is where BHP sees the greatest slice of its claimed $US1.7 billion a year in cost savings and $US2 billion a year in volume gains.

Listen to yesterday’s discussion with Deborah Cameron on 702 ABC Sydney about Rio, Rupert and Rudd.

Peter Fray

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