China may exert efforts to prevent BHP Billiton-Rio Tinto merger

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.