Go for cash, investors tell Rio, BHP

Louise Armitstead
January 31, 2011

INSTITUTIONAL investors have written to BHP Billiton and Rio Tinto demanding that they ditch ambitions for ”wasteful mega-deals” and each embark on multibillion-pound share buyback schemes instead as speculation builds that BHP is lining up another big takeover target.

The shareholders, who have written individually, have asked for commitments from the boards of the mining companies that they use their strong balance sheets to return cash to investors.

The investors have moved to pre-empt deals in the mining sector that analysts and investment bankers have predicted.

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Some shareholders have told the companies they are prepared to move to vote down the re-election of key members of the board if they do not agree to the commitments.

On Friday, rumours swept the market that BHP was planning a bid for BG Group. Analysts at Exane BNP Paribas fanned the flames by saying that a takeover would allow BHP to revitalise its oil and gas arm.

BG has extensive interests in Australia following the 2008 acquisition of Origin Energy for $13 billion, and late last year announced plans to spend $15 billion developing an LNG project in Queensland.

In London trading, BG’s shares rose to £14.041 ($A22.38) valuing the company at £4.5 billion, while BHP shed 53p to £23.841.

Investors have been spooked by the rumours coming so soon after BHP’s disastrous $US40 billion hostile attempt to buy Potash, the Canadian giant.

The bid’s failure fed expectations that BHP would target the energy sector as its only viable expansion option.

One of BHP’s top 10 shareholders said: ”Frankly after the Potash debacle, we are not too enamoured with BHP’s bid ambitions. It was expensive and ambitious and even then Marius Kloppers [chief executive of BHP] told us that we wouldn’t see the benefits of the deal for as long as 10 years. This is not the sort of thing we want him to spend the money on.”

Another investor said: ”Kloppers is very deal hungry – he’s told us he wants to preserve the cash for expansion, but we just don’t see the point, or the value.”

BHP has reportedly got an eye on Anadarko, one of BP’s partners on the ruptured well in the Gulf of Mexico.

Rio chief Tom Albanese is seen as being just as ambitious to complete a deal, particularly after the collapse of its merger talks with BHP three years ago.

Rio is in talks with Australian miner Riversdale over an agreed $3.9 billion bid. The company has also agreed to increase its holdings in Ivanhoe Mines in Mongolia.

Rio approved major capital projects totalling $5.5 billion in the fourth quarter last year.

The company spent time recovering after it bought Canadian aluminium producer Alcan for $38 billion in 2007.

The damage to Rio’s balance sheet from what was regarded as a reckless acquisition, made when global metal prices were at record highs, had to be repaired by a series of asset sales and a $15.2 billion rights issue.

The company’s net debt load is now $27 billion lighter than it was at the end of 2009.

One of Rio’s key shareholders said: ”There’s a danger with Rio that Riversdale is just the start. We want assurances that there will not be any attempt at big deals.”

Sourced & published by Henry Sapiecha

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