Market Wrap - Week Ending Friday 14th Dec 07

By Jason Fittler

BHP and RIO, the story so far behind the takeover. There is a cathartic value in putting the two companies together; they want simpler larger assets so they can manage them better.

It’s not surprising that RIO directors haven’t changed their tune after coming out originally with a dismissal of BHP's 3 for 1 proposal. Just as RIO directors believe the company has hidden value, which they have tried to address in some part, BHP directors also believe that they have a significant growth pipeline and an ability to add value. For us the key issue appears to be that RIO have a blindfold on and do not appear to want to learn if there is something missing in their assumed value of BHP and an ability for RIO shareholders to share in a joint re-rating.

BHP does not want to burn the value derived through combining BHP and RIO operations.  Its view is that there’s probably just as much hidden or unaccounted for value in BHP as there is in RIO, and that there is upside for all shareholders in combining the two groups in an earnings accretive fashion.

All about the facts or perhaps it is more about changing shareholders perception of the performance of RIO versus that of BHP. BHP presented their version of the facts which demonstrates that BHP delivered greater returns to shareholders. The fact is that BHP has grown its business twice as fast as RIO.

The recent BHP road show on the merger certainly stressed that the merger had to be a win-win situation for both shareholder bases, not just for RIO's. Will this merger go ahead? It is hard to say, but I expect that this will play out for many months yet.  This is a positive for RIO as the share price should hold at the current level.

Until next week.

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