BHP bid acts like a noose on Rio

Rio Tinto is working to restore its balance sheet to give it the flexibility for major acquisitions, says its finance director, Guy Elliott, but is constrained by BHP Billiton's hostile takeover bid. "That [factor] would cause us not necessarily to say no, but at least to hesitate before making a big acquisition," he said in Sydney recently. "I think a small- or medium-sized acquisition is a totally different thing and we could easily accomplish that." Since launching its bid for Rio in February, BHP has acquired Canadian partner Anglo Potash for C$284 million (A$309 million) and New Hope's New Saraji coal project in Queensland for US$2.5 billion (A$2.9 million). But Rio must be careful that any deals it makes do not constitute "frustrating action" under Britain's Takeover Panel's guidelines. Rio's chief executive, Tom Albanese, told the Herald yesterday his company would wait to sign an investment agreement with the Mongolian Government before considering an increase in its stake or a potential takeover of its Oyu Tolgoi copper-gold project partner, Ivanhoe Mines. Rio is still digesting its US$37.8 billion purchase of the Canadian aluminium producer Alcan last year. Mr Elliott said he expected it would soon exercise its option to roll over US$7 billion in short-term debt associated with the purchase for another year. Rio is planning to sell at least US$15 billion of assets by next year to help pay off its debt, including US$10 billion this year. It has already sold US$3 billion of assets, but three divisions - each estimated to be worth more than US$4 billion - are still for sale. Mr Elliott said it was reasonable to assume that at least one of the large divisions - Alcan packaging, Alcan engineered products and US energy coal - would have to be sold by the end of the year for Rio to meet its target. Mr Albanese said the Alcan divisions took more time to prepare for sale because they had tens of thousands of employees and legacy accounting systems from Alcan's predecessors, Alusuisse and Pechiney. After the Alcan deal, Rio has been highlighting its extensive options for organic growth as evidence that BHP's 3.4-for-1 scrip deal undervalues the company. BHP has insisted its offer is about relative, not absolute, value, since it is offering Rio a 44 percent stake in the combined company. Mr Albanese noted Rio's earnings had grown 30 percent in the last financial year, while BHP's had increased by only 15 percent. "Looking ahead to the next five, the next seven or eight years, we have superior growth," Mr Elliott said. He said Rio was considering absolute value as well as the growth potential of both companies. "One interesting thing about the asset sales is that where we've made them, they've been at very good prices," he said. "And so I think there is a read-across you can make from that about the value of Rio Tinto." Source: www.stuff.co.nz