In the latest development in the merger saga between
BHP Billiton and
Rio Tinto - the top two
iron ore giants in the world -
Rio Tinto is reported to be considering the sale of some of its shares to
BHP Billiton if the price is found to be acceptable, thereby marking a change in its stance of outright opposition to the
BHP Billiton move.
Due to
BHP Billiton's bid to takeover
Rio Tinto, concerned parties in
China have being calling for a series of urgent meetings since November. So far, according to the latest statements from the Chinese government and the major domestic steelmakers,
China will definitely not just stand idly by but will take active measures to prevent the proposed takeover. According to the Chinese side, such a takeover would put
China's steelmakers in a more negative position in future
iron ore price negotiations because the combined entity would be the world's biggest supplier of
iron ore, copper and aluminum, as well as being a major producer of coal and zinc. Just like Arcelor-Mittal in the steel industry, the merged company would be the dominant force in the mining industry, being several times bigger than its nearest rivals.
China's steelmakers have two options in their efforts to prevent the proposed takeover: A) to form a financial group to compete directly with
BHP Billiton for the purchase of
Rio Tinto; B) to buy
Rio Tinto's stocks in the overseas capital markets directly or indirectly and become the biggest shareholder of the target company, and then reject any
M&A offer from
BHP Billiton.
However, the first choice is practically impossible due to two main factors. Firstly, the total of almost $200 billion required to take over
Rio Tinto is too high for
China's steelmakers. Secondly, the Australian government will not easily accept the takeover of a domestic miner by a foreign company, since the mining industry is regarded as one of the country's most important industries. Thus, the second option mentioned above appears to be the more feasible one. In fact,
China's steelmakers have already consulted domestic financial institutions and have sought support from the relevant government departments and from the CISA.
China's government is very concerned about this merger case since it fears that the combination of the two
iron ore giants will have a detrimental influence on
China's steel industry, and even on the healthy development of the national economy. An unnamed high-ranking
China government official has said that if necessary the Chinese government may possibly enter into direct contact with the
UK and Australian governments in the near future in order to prevent the joining together of the two mining giants.
Most recently,
BHP Billiton offered
Rio Tinto three
BHP shares for each Rio share. If the latter accepts to convert all its shares to those of the new combined entity, it will control about 41 percent of shares of the merged company. Current speculation is focusing on how many
Rio Tinto shares will be included in the deal and on whether the price for each share could be higher.
Furthermore, the attitude of the Australian authorities is another important factor. Although the
Australia government would prefer to see the merger take place between the two
Australia-based companies (
BHP Billiton's main business is in
Australia), new Australian premier Kevin Rudd has a very good relationship with
China's government and is interested in promoting cooperation between the two countries. This factor could perhaps weigh in favor of the Chinese steelmakers.