BHP might have appeared just a little hairy chested on Wednesday by going “hostile” with its RIO bid and declaring a minimum acceptance level of 50 per cent – but it really didn’t mean anything.

BHP knows it can’t get just 51 per cent of Rio – its main Australian shareholders aren’t interested in such a number. And the ambiguity about which company “its” refers to is intentional.

What’s been hugely overlooked so far is the necessity for the big Australian institutions to obtain capital gains tax rollover relief – something that doesn’t come with a simply majority of shares. Heavens knows Australia’s funds managers are desperate for some performance to lift their numbers in the present climate, but paying a hefty capital gains tax bill on Rio shares that most of them have held for many years wouldn’t help.

Bruce Teele, doyen of the listed investment company sector and chairman of AFIC, spelt out the importance of an agreed deal in an interview for this evening’s Eureka Report. The idea of the merger is attractive to him, but not if there’s a capital gains tax slug.

BHP is AFIC’s biggest single investment — $570 million worth on December 31 and it’s bought more since then during the market’s late January panic. And Rio is the company’s fourth largest bet — $337 million worth.

That’s a common story for Australia’s institutions – big feet in both camps – meaning this will need to be that rare thing, a genuine “win-win” merger to be attractive to them.

So never mind the smoke shells fired during these early stages of the phoney war; there’s a deal to be done in boardroom negotiations, not by trench warfare. It’s what’s wanted by the shareholders who count.

Peter Fray

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