Only in the topsy-turvy world of corporate finance could a hug be a sign of war. BHP Billiton, the Anglo-Australian miner, has put the squeeze on rival Rio Tinto Plc. after Rio rejected its $150 billion (Rs5.90 trillion) all-share bid.
Given the strong logic of a tie-up between the two miners, it’s smart for BHP to put its case to shareholders directly. But BHP’s own investors would pay the price for too much hostility. A BHP-Rio combination would make and financial sense. BHP has fingered synergies of $3.7 billion a year, suggesting a net present value of around $26 billion—7% of their combined market value.
In fact the benefits should be much bigger, since a bigger group could bargain better with big Asian customers. BHP hasn’t publicly factored in those benefits, presumably for fear of spooking its Asian clients. The question isn’t why, then, but how? BHP’s three-for-one share offer values Rio at $150 billion, giving its shareholders around 44% of the combined group. BHP may have to do better than that to win their hearts and minds. Rio shares were trading around 10% above BHP’s offer by Friday evening, giving them 46% of the combined entity. In a tie-up worth $370 billion, that extra couple of percentage points is no small matter.
Rio can probably push for a bigger slice of the cake, especially since many of the cost savings would come from its more developed infrastructure in places such as western Australia. But it shouldn’t push too hard, since BHP’s offer isn’t just about price. By getting shares, Rio shareholders share the glory if the deal goes better than expected.
Management positions too could be up for grabs, although BHP hasn’t spelled out which. The best thing for BHP shareholders would be for the bear-hugging miner to focus on keeping things friendly. Sure, it might have to buy that friendship with an increase in the value of its bid—probably best done by offering more paper rather than adding cash.
But it’s probably worth it. A friendly embrace is much more likely to add value than the grizzly variety.