BHP Billiton Ltd, the world's largest mining company, may need to offer a 60 percent premium to buy Rio Tinto Group, Perennial Investment Partners Ltd said.
"Perhaps that's the price to get a friendly merger," Ken West at Melbourne-based Perennial Investment, which manages A$20 billion (US$18 billion), including Rio shares, said in an interview shown on ABC yesterday.
Rio paid a similar premium to buy Alcan Inc for US$38.1 billion, he said.
Rio won't consider any bid below ?70 (US$146) a share, the Times of London said yesterday, citing unidentified people close to the third-largest mining company. That was a 61 percent premium to the stock's price before Melbourne-based BHP said on Tuesday Rio had rejected an indicative three-for-one share offer.
The proposed takeover, which could be the world's largest, underscored BHP chief executive Marius Kloppers's prediction that a five-year rally in commodities would be sustained. BHP may need to add cash to its offer, investors said.
Rio rose to a record in London and Sydney trading on Friday, valuing the company at US$172 billion. Rio's closing price of 5,624 pence in London was 15 percent more than BHP's proposed offer. BHP fell 1.7 percent in London.
BHP spokeswoman Samantha Evans declined to comment yesterday. Ian Head, a spokesman for London-based Rio Tinto, also declined to comment.
BHP will pursue talks with Rio, the company said in a statement on Thursday. The bid "significantly undervalues Rio Tinto and its prospects," Rio said in a separate statement the same day.
BHP is arranging a US$70 billion loan through Citigroup Inc and could use US$30 billion as a cash sweetener for Rio investors, the Times said, without citing a source.
"They'll have to give a cash alternative," said Ray Chantry, an analyst at E.L.&C. Baillieu Stockbroking, in the same ABC interview. "Fund managers certainly want a scrip alternative, but some will want cash."
The merged company's assets would include a stake in Chile's Escondida, the world's largest copper mine, and operations in uranium, aluminum, diamonds, lead and nickel. It could generate between US$3 billion to US$5 billion in pretax cost savings and a friendly bid would create the most value, UBS AG said last week.
Combining BHP and Rio, which just bought aluminum producer Alcan, would create a company with estimated net income of as much as US$26 billion, said Tony Robson, co-head of mining research at BMO Capital Markets.
It would have a market value of US$379 billion at Friday's closing prices in Sydney and London and would have more than a third of the iron-ore market, the most energy coal and copper reserves, and operations in six continents.
"This is unquestionably about buying existing assets and leveraging off China and India for the next 15 years," Chantry said. "There's a strong project pipeline within Rio Tinto."
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