Chinese Steelmakers Study Bid for Rio to Counter BHP

Chinese Steelmakers Study Bid for Rio to Counter BHP

Dec. 4 (Bloomberg) -- Chinese steelmakers, the largest buyers of iron ore, and the government are studying a joint bid for Rio Tinto Group to counter a $134 billion offer from BHP Billiton Ltd.

``It's an issue being discussed by top-level officials,'' said Chen Hanyu, a director at the resources office of Beijing- based Shougang Corp., the nation's ninth-largest steelmaker. Members of the China Iron and Steel Association have held talks, said Vice Chairman Qi Xiangdong.

The steel mills want to block BHP's offer because the deal would give the world's biggest mining company control of almost half the Asian market for iron ore. Rio shares closed lower in Sydney trading, reflecting doubt that China will proceed with an acquisition that would dwarf Cnooc Ltd.'s failed $18.5 billion bid for Unocal Corp., rejected by U.S. lawmakers in 2005.

``There are clear strategic reasons why they would consider'' a bid, Angus Gluskie, who helps manage the equivalent of $500 million at White Funds Management, including Rio and BHP shares, said in Sydney. Australia's newly elected Labor Party government may oppose such a transaction, he said.

Baoshan Iron & Steel Co., the listed unit of China's largest steelmaker, rose 77 yuan, or 5.2 percent, to 15.53 yuan at the 3 p.m. close in Shanghai.

Rio, based in London and the world's third-largest miner, fell 31 pence, or 0.6 percent, to 5,412 pence as of 9:16 a.m. in London. Rio's London shares are trading at an 11 percent premium to BHP's proposal, indicating investors expect a higher offer. The premium has narrowed from as wide as 15 percent on Nov. 12.

China's Acquisitions

China has been scouring the world for resources. Aluminum Corp. of China bought Peru Copper Inc. for $860 million in August, Anshan Iron & Steel Group in Sept. agreed to a A$1.8 billion ($1.6 billion) Australian iron-ore joint venture, and Cnooc last year spent $2.7 billion buying Nigerian oil fields.

A bid ``is pretty positive for China's steelmakers,'' said Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai. ``The control of raw material costs makes sense.''

Baosteel Group Corp., the nation's largest steelmaker, and domestic rivals are studying a bid, the 21st Century Business Herald said today, citing Baosteel Chairman Xu Lejiang. Fan Shunbiao, a spokesman for Baosteel, said he's not aware of any talks on a bid. Amanda Buckley, a Melbourne-based spokeswoman for Rio, declined to comment today. Samantha Evans, a Melbourne-based spokeswoman for BHP, also declined to comment.

``Chinese steelmakers, if united, are capable of making such a bid,'' said Lu Yizhen, who helps manage $640 million at Citic Prudential Fund Management Co, in Shanghai. ``It's also likely that steelmakers want to influence the shares of Rio, blocking BHP's bid.''

Financial Ability

Chen Bin, director of the industrial department of the National Development and Reform Commission, which supervises China's steel industry, said the commission is not involved in any Rio Tinto bid proposal.

``A few of the biggest steelmakers in China and the central government may team up for the bid,'' Shougang's Chen said today in an interview. Chinese steelmakers have the financial ability to bid for Rio and are awaiting for a decision from the government, Zhao Kun, vice president of Baosteel, in charge of merger and acquisitions, said Nov. 26.

A five-year increase in metal prices has spurred about $185 billion of bids in the industry in the past year, according to data compiled by Bloomberg. China this September created a sovereign wealth fund, China Investment Corp., with $200 billion to seek investments to improve returns on its $1.46 trillion of reserves.

The investment fund last week denied a report in the China Business Journal that it may bid for Rio Tinto. Based on Rio's closing share prices, the company is valued at $169 billion.

More Acquisitive

``It's almost an open secret that China wants to secure more overseas resources assets,'' said William Fong, who helps manage $6.8 billion of Asian equities at Baring Asset Management Asia Ltd., in Hong Kong. ``BHP's bid for Rio is probably a trigger.''

Chinese companies have grown more acquisitive. The Industrial and Commercial Bank of China Ltd. is buying a 20 percent stake in Africa's largest lender Standard Bank Group Ltd. for 36.7 billion rand ($5.4 billion), the country's largest overseas purchase. Ping An Insurance (Group) Co. last month bought a 4.2 percent stake in Fortis, Belgium's largest financial services company.

Beijing Shougang Co., the publicly traded unit of Shougang, rose 2.6 percent to 7.61 yuan in Shenzhen at the 3 p.m. close.

Australia's previous coalition government blocked Royal Dutch/Shell Group's proposed takeover of Woodside Petroleum Ltd. in 2001. Cnooc, China's third-largest oil producer, was blocked from buying Unocal Corp. in 2005 by U.S. lawmakers.

New Round

``There has always been a strong nationalistic view point held by the Labor Party that supports Australian ownership of its resources,'' said White Funds' Gluskie. ``That would suggest that from a governmental perspective they may be anti that type of move.''

Rio's Chief Executive Officer Tom Albanese has told investors BHP's three-for-one stock proposal undervalues his company. A BHP takeover of Rio would trigger a new round of acquisitions and exert ``very heavy pressure'' on the management of Chinese mining companies, China Shenhua Energy Co., the world's second-largest coal company, said last month.

BHP and Rio would together control 38 percent of the global seaborne iron ore trade, according to the Australia & New Zealand Banking Group Ltd., rivaling the largest producer Cia. Vale do Rio Doce. The proposal has met with objections from steelmakers in China, Japan, South Korea and Europe.

``Chinese steelmakers are so fragmented, putting them in a weaker position when negotiating with giant iron ore suppliers,'' Helen Wang, a Shanghai-based analyst at DBS Vickers Hong Kong Ltd., said by phone today. ``They have to face the reality that they have no choice other than teaming up with the government for a possible counter bid for Rio.''

BLOOMBERG