Rio Tinto shares hit their largest discount to the BHP Billiton offer on Friday, a sign that the market reckons the deal won’t happen, even given the improving outlook for the markets.
BHP has offered 3.4 of its shares for every Rio share. That had a nominal value of $US162 billion when those terms were set back in February.
On Friday Rio shares closed 6.3% under the value of the BHP offer, or a discount of $9.36.
BHP shares rose 52c on Friday to end at $43.42, Rio shares jumped $2.26 to end at $138.26. But the value of the BHP offer was $147.62, based on the closing price for BHP, so the discount was substantial. At one stage on Friday it was over 7%.
BHP is yet to lodge an application for approval to the European Commission, the European Union’s antitrust regulator, and its bid is also conditional on approval by regulators in Australia, the US, South Africa and in Canada (Quebec).
The commission will take representations from steelmakers in China, Japan, South Korea and Europe who oppose the proposed deal. They claim the proposed merger would concentrate influence over global iron-ore prices by combining the second-and third-largest exporters.
BHP has been taking a more strident tone in its attacks on Rio, whose chairman last week trailed the ‘break up’ idea as suggestion. If that’s a suggestion, why did Rio spend the best part of $A44 billion in buying Alcan last year?
A break up would involve losses on the sale of assets like Alcan this soon after the purchase. A dismembering of Rio is just talk from the company and not a real idea.
It is saying; ‘BHP is right, we don’t have any real idea about adding value’.
Investors are waiting for the big news from both companies: confirmation of settlements in coking coal, thermal coal and iron ore buyers in Asia and the final price rises. That will do more to drive the eventual outcome than the shadow boxing we have been witnessing lately.
The shares of the ‘junior’ iron ore mining and exploration stocks went running last week after the Sinosteel move on Midwest Corp succeeded and talk re-emerged of claims of rising Chinese interest in the sector and especially Fortescue Metals Group.
FMG is due to start exports in the next two weeks, but there are suggestions that mystery Chinese or Asian buyers will emerge as shareholders.
Hopes of a final settlement between Rio and BHP and Asian steel mills with big price increases of 65% or more, is also helping improve sentiment.
Friday saw some big upward moves: Aurox Resources 24.3% to 94.5c, Gindalbie Metals 20% to $1.10, BC Iron Ltd 17.9% to $1.45, Brockman Resources 12.8% to $2.64, Shaw River Resources 9% to 10.5c, Territory Resources 7% to 91c, Atlas Iron 6.6% to $3.37, Fortescue Metals 5.4% to $8.21 and Mount Gibson Iron 5.1% to $3.07.
And thanks to the BG bid for Origin Energy, the gas sector was hot last week. Santos hit an all time high of $17.80 last week before closing up 3.5% on Friday at $17.71. Arrow Energy, a Central Queensland coal seam gas producer jumped 21.4% to $2.83 as punters speculated it would be next to go. Queensland Gas rose 18.7% to $5.33. BG already has 9.9% of QGC, and will be a major shareholder in the proposed LNG plant at Gladstone.
Origin jumped 39% to $13.91, under the proposed price of $14.70 suggested by BG: a sign the market is starting to believe that the bid is finely pitched, given the prospects for price rises in the cost of gas from Australia and domestically if the BG deal succeeds.
On the ABC’s Inside Business yesterday, Ivor Ries, the Research Director of Melbourne broker EL and C Baillieu said "I think the market has failed to grasp the fact that global gas prices have quadrupled in the last four years and this company is extremely gas rich, the share price is just taking a long time to catch up with the new global reality.
"I think the Origin Energy board will ask for a least a dollar above this bid price and they will be entirely justified in doing it, and if BG is able to get Origin at $15.50 in five years time it will look like a fantastic deal.
"A lot of institutions think it’s a very good price but they haven’t really done the math yet on the effective price that BG is offering to buy the gas at. Essentially BG is offering to buy Origin’s five trillion cubic feet of gas for 40 cents a gigajoule and the going market price in Asia at the moment is somewhere between 10 and 12 dollars so when they do the math they’ll actually realise it’s actually not a fantastic offer and I don’t think the bid will get anywhere at this price."
Should the ASX query itself?
After all a $2.69 (7%) rise on Friday is more than enough reason for some to ask ‘please explain’. The shares closed at $37.82.
But then the ASX is both judge and jury, so I suppose we can’t expect too much.
It hit a low of around $34 on April 14, so the increase of around $3.78 isn’t spectacular, only around 11%. But seeing most of it happened on Friday….
Perhaps it was a belated reappraisal of the company’s performance in April when the market rose more than 4% and had its strongest period for around five months. But the ASX makes money no matter if the market is rising or falling: it just makes more money when it rises.
Now what about the shorting, naked and covered and the stock lending?
Insurer and funds manager, Tower Ltd has requested a trading halt in its shar
