Investors seem sure that BHP Billiton will continue its US$149 billion pursuit of Rio Tinto, a combination that would control more than one-third of the world's iron ore sales.
Rio Tinto rejected BHP Billiton's three-for-one share offer, but share price gains in London and Australia indicate investors expect BHP Billiton to increase its offer, the bid to turn hostile or another bidder to emerge.
BHP said in an overnight statement confirming its approach to its mining rival that it "intends to seek an opportunity to meet and discuss its proposal with Rio Tinto."
"Obviously BHP are interested," said Warren Edney, an analyst with financier ABN AMRO. "Will it go hostile? I don't know. I guess it depends on what other proposals BHP comes up with."
BHP Billiton said after the Australian market closed on Thursday that it had approached Rio Tinto in a deal, according to deal tracker Dealogic PLC, worth US$149 billion. Such a merger would be the world's largest since Vodafone AirTouch's US$172.2 billion takeover of German telecom Mannesmann in a deal completed in 2000.
Rio Tinto shares rose as much as 22 percent in early trade on the Australian Securities Exchange before falling back to A$130.90 (US$121.29) at the close, still up 15.4 percent.
Shares of BHP Billiton, meanwhile, fell to A$42.47, down 1.8 percent, after having gained as much as 1.3 percent earlier.
In London, where both companies are also listed, Rio Tinto's share price jumped 22 percent overnight and BHP Billiton's fell 5.7 percent.
Tony Robson, an analyst at BMO Capital Markets, told Dow Jones Newswires BHP Billiton's offer sets the agenda only, leaving the door open for revised terms. Banks would be queuing up to provide debt to sweeten the offer, he said.
"If it was an equivalent cash bid, it probably [is on the low side], but it's not a cash bid, BHP are issuing shares," Edney said.
"They believe that shareholders will want to retain an interest presumably in the merged entity and that the merged entity will be better than the [separate companies]," he said.
Analysts, though, say BHP would have to increase its three-for-one share offer to at least a 3.5-for-one offer to encourage Rio to enter discussions.
A BHP Billiton spokeswoman said yesterday there was nothing to add to Thursday's statement.
"We've rejected the proposal, and we've got nothing further to report," Rio Tinto spokesman Ian Head said.
Rio Tinto's objection to the deal is that it "significantly undervalues" the company, it had said in an earlier statement.
Australia's competition regulator, the Australian Competition and Consumer Commission, said yesterday that concerns about dominance of Australia's iron ore market would be central to any investigation into a merger. The deal would need the approval of Australian regulators.
Australian Prime Minister John Howard said any merger was a matter for the companies' shareholders and directors to decide.
"Anything that strengthens the focus on Australia as an economic powerhouse is good for this country," Howard told Melbourne Radio 3AW.
BHP Billiton, Rio Tinto and Brazil's Companhia Vale do Rio Doce (CVRD) account for 70 percent of all global iron ore sales. BHP Billiton accounts for around 15 percent, with Rio Tinto responsible for 24 percent, which would give a combined company a 39-percent share of the world iron ore market.
Earlier this year, speculation swirled that CVRD would team with BHP Billiton in a joint bid for Rio Tinto, then break up the company.
At US$149 billion, the deal proposed by BHP would exceed last month's US$95 billion takeover of Dutch bank ABN Amro Holding NV by a consortium of banks led by Royal Bank of Scotland PLC, the largest merger-and-acquisition deal so far this year.
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