Blog > Gold and Resources > Blog article: Global Mergers: The End of the Resource Boom?
 | Email This Article Email This Article  | 

Global Mergers: The End of the Resource Boom?

Posted November 14, 2007

“Merger talks between BHP Billiton and Rio Tinto could signal the end of the commodities boom, say some analysts. If you believe that I’ve got the deed to the Brooklyn Bridge up on eBay. Care to put in a bid?” — Sara Nunnally

by Sara Nunnally, Today’sFinancialNews.com

Wednesday, November 14, 2007

Baltimore — (TFN): BHP Billiton cheerfully submitted a takeover offer for Rio Tinto on Monday, November 12. It’s worth $174 billion. You’d think that’d be like dangling a crown in front of a homecoming queen candidate, right?

Not so: Rio Tinto rejected the offer.

Turns out, Rio thinks that crown’s a cheap piece of tin, and how dare BHP snub the world’s largest supplier of industrial metals and the world’s second largest supplier of iron ore!

Now, like a spurned lover, Rio Tinto is refusing to talk to BHP.

It doesn’t matter that BHP’s offer constituted a 25% premium to Rio Tinto’s price at the time. And apparently it doesn’t matter that BHP offered an additional $30 billion in the form of a share buyback.

Rio Tinto’s not going for cheap, and the number one factor that could influence its decision is China. In fact, it’s been rumored that China Development Bank has started buying up shares in Rio Tinto so that it would have the power to block a merger between the two largest Australian mining companies.

China Development Bank has denied taking a stake in Rio Tinto, but if it’s true, it will be the first time a Chinese state-backed entity has taken a direct stake in a global mining firm, according to Forbes and Britain’s Daily Telegraph.

Here’s why China’s so scared.

The merged companies would control about 40% of the world’s iron ore sales. China’s booming industrial growth already accounts for about 50% of the world’s production. BHP would have unprecedented power over the price of iron ore.

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. Click here to pick your favorite reader. If you prefer to have the feed delivered to your email, just click here.

Looks like BHP’s got a tougher row to hoe than it expected. But let’s assume for a moment that Rio does eventually agree to this merger. What does that mean for the mining industry, and resource companies as a group?

Some analysts – and I’m not going to name names, here – would remind investors that the two previous huge mergers signaled the top of the tech boom. I’m talking about the Vodafone-Mannesman merger and the Time Warner-AOL merger.

This is comparing apples and oranges, folks. The two sectors are so completely different. It’s like saying that bleaching your red sweater has the same effect as bleaching your white button-down shirt.

And commodities as a whole have so many different factors influencing it that a possible merger between two mining companies can scarcely be blamed for a crash in corn prices. Truly, if you believe that a BHP/Rio merger signals the end of the commodities boom, I’ve got the deed to the Brooklyn Bridge up on eBay. Care to put in a bid?

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. Click here to pick your favorite reader. If you prefer to have the feed delivered to your email, just click here.

Related Articles:
Resource Investing: What to make of the Rio Tinto - BHP Billiton merger plans

Is this the end of the commodities boom?

BHP eyes booming China in Rio Tinto bid

BHP Sweetens on Rio Tinto


Related Articles


Posted by Sara Nunnally · Filed Under Gold and Resources 

Comments

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus