Wednesday, February 6, 2008

BHP Falls After Raising Rio Offer to $147 Billion

(Bloomberg) -- BHP Billiton Ltd., the world's largest mining company, tumbled in London trading after raising its hostile bid for Rio Tinto Group to $147 billion and reporting the first drop in profit in more than five years.

BHP declined as much as 6.4 percent in London and fell the most in 20 years in Sydney after increasing its offer 13 percent to 3.4 shares for every one of Rio Tinto's. The Melbourne-based company reported today its fiscal first-half net income unexpectedly slipped 2.4 percent to $6 billion, citing higher production costs and lower prices for some metals.

Chief Executive Officer Marius Kloppers sweetened the bid five days after Aluminum Corp. of China, China's biggest aluminum company, bought a stake in Rio to block the takeover. The combination of BHP and Rio, the world's largest mining industry takeover, would cut operating costs in Western Australia and vie with Brazil's Cia. Vale do Rio Doce as the world's largest supplier of iron ore.

``BHP would not have been surprised by the emergence of the Chinese, but it has forced them to indicate they're serious about pursuing this deal,'' said Richard Dennis, a fund manager at Bournemouth, U.K.-based Wessex Asset Management, which has $490 million invested in natural-resource stocks. ``There will be another bid to come from BHP if they are to get final acceptance.''

BHP dropped as much as 102 pence to 1,495 pence, the biggest slide in more than two weeks, and was 4.6 percent lower at 1,523 pence as of 11:28 a.m. on the London Stock Exchange. Earlier it slumped 7.5 percent on the Australian Stock Exchange, the biggest decline since December 1987, amid a plunge in Asian stocks.

`Ratio Makes Sense'

Rio fell 14 pence, or 0.3 percent, to 5,420 pence in London. The shares traded at a premium of 2.7 percent over the value of the bid, based on BHP's current share price. Aluminum Corp. of China Ltd., or Chalco, Chinalco's publicly traded unit, declined as much as 12 percent in Hong Kong trading.

State-owned Chinalco and Alcoa Inc. paid 6,000 pence ($117.85) a share for a 9 percent stake in Rio last week. That equated to 4.1 BHP shares for every one of Rio's London shares compared with BHP's initial three-for-one offer.

``Rio should be having a discussion,'' Don Williams, who helps manage $1.3 billion at Platypus Asset Management, said by phone from Sydney today. He sold half of Platypus's Rio holding on Feb. 4 after the Chinalco and Alcoa transaction. ``This ratio makes sense.''

BHP's bid values Rio at 13.6 times earnings before interest and tax, compared with the 13.7 times that Rio paid for Alcan Inc. last year.

Moody's Investors Service may cut BHP's fifth-highest investment-grade ranking of A1 following the offer, the credit assessor said in a statement. Standard & Poor's today affirmed BHP's rating and said the outlook was ``negative.''

Debt Risk

The risk of BHP and Rio defaulting on their debt, as measured using credit-default swaps, increased to records. Contracts on the BHP bonds, which rise as perceptions of credit quality deteriorate, gained 17.5 basis points to a record 110 basis points at 5:18 p.m. in Sydney.

BHP's debt will increase almost seven times to about $85 billion should the takeover proceed, said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney.

Credit-default swaps on Rio Tinto's debt increased 10 basis points to 110 basis points. The price means it costs $110,000 to protect $10 million of debt from default for five years.

BHP, which made an initial approach in November, had until today to formalize its offer or walk away for six months after a U.K. Takeover Panel ruling.

Possible Counter Bid

Chinalco may be preparing a counter bid, the London-based Times newspaper said, citing unidentified people. Lu Youqing, vice president of Chinalco, wouldn't comment on the newspaper report when contacted by telephone. Chinalco and Alcoa said in a statement today they will ``closely monitor further developments.''

``What BHP faces is not just a state-owned company, but a country,'' Geoffrey Cheng, a Hong Kong-based mining analyst with Daiwa Institute of Research (HK) Ltd., said by telephone. ``I don't think Chinalco will make a general offer for Rio Tinto as it may face many regulatory hurdles.''

China needs raw materials to feed an economy that grew 11.4 percent in 2007, the fastest in 13 years. The nation's biggest commodity companies, including Chalco, have said they're concerned the combination would concentrate supplies and may wield too much pricing power.

``This is our first and only offer,'' Kloppers said in the media teleconference. ``We absolutely want full control of this company,'' Kloppers, 45, said. He wouldn't say whether it would be the final offer, a declaration that would prohibit him from raising the bid.
 

Goldman's Viniar Says `Fear Overwhelms Greed' in Credit Markets

(Bloomberg) -- U.S. credit markets are trading ``like we're in the middle of the worst recession we've seen in a very, very long time,'' Goldman Sachs Group Inc. Chief Financial Officer David Viniar said at an investor conference today.

``There is a lot of liquidity out there, but people are very hesitant to use it,'' Viniar said at the conference in Naples, Florida, sponsored by Credit Suisse Group. ``Within the credit markets, fear has overwhelmed greed.''

Goldman, the most profitable securities firm in Wall Street history, is down 12 percent in New York Stock Exchange trading this year on concern a weakening economy will damp revenue from investment banking, trading and fund management. The level of interest from investment-banking clients is ``very high,'' though the economy will determine whether deals get done, Viniar said.

Viniar, 52, also said he expects to see a plan devised that will help the monoline bond insurers, which are facing potential rating downgrades.

``It is likely that you will see some solutions to what's going on with the monolines,'' he said. ``You have a number of companies who are involved in a lot of different things, so I think it's going to be more complicated'' than the industry bailout of hedge fund Long-Term Capital Management LP in 1998.
 

Wall St eyes bounce at open on media profits

(Reuters) - Stocks headed for a higher open on Wednesday as profits from Walt Disney Co (DIS.N: Quote, Profile, Research) and Time Warner Inc (TWX.N: Quote, Profile, Research) pointed to strength in earnings outside of the financial sector.

In economic news, U.S. productivity in the fourth quarter rose at a stronger-than-expected pace as the biggest cutback in working hours in nearly five years helped restrain growth in labor costs, the Labor Department said.

The market was poised to rise a day after recession fears sent Wall Street and markets in Europe tumbling, while overnight markets in Asia also slid.

"It's probably the natural inclination of markets to try to bounce after a bad day," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "There's no question that Disney helped and productivity numbers coming in better than expected didn't hurt either."

S&P 500 futures rose 4.7 points and were above fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures were up 20 points. Nasdaq 100 futures rose 6.5 points.

In deal news, global miner BHP Billiton Ltd/Plc (BHP.AX: Quote, Profile, Research) launched a hostile $147.4 billion bid for rival miner Rio Tinto Ltd/Plc (RIO.AX: Quote, Profile, Research) on Wednesday, ending months of speculation and setting the stage for the world's second-largest takeover.
 

Wachovia accused of aiding telemarketing fraud

(Reuters) - Wachovia Corp (WB.N: Quote, Profile, Research), the fourth-largest U.S. bank, is fighting a lawsuit accusing it of letting fraudulent telemarketers use its accounts to bilk millions of dollars from consumers, court papers show.

Documents filed last month in the U.S. District Court in Philadelphia, also reported in the February 6 edition of The New York Times, detail accusations the bank and its lawyers knew about the fraud allegations for years.

The plaintiffs accused Wachovia of allowing some "payment processors" to create authorized, unsigned checks on behalf of telemarketers to withdraw funds from customer accounts between 2003 and 2006, court papers show.

They also accused Wachovia of trying to win or retain business from companies that it knew were accused of telemarketing fraud, despite being alerted by other banks about the deceptive activity, the papers show.

The original complaint was filed last April. Plaintiffs are seeking class-action status on behalf of at least 346,000 victims they say lost millions of dollars, the documents show.

Wachovia has sought to dismiss the complaint.
 

Mattel CEO sees positive 2008, cost concerns

(Reuters) - Mattel Inc's chief executive said on Wednesday he does not expect a repeat of last year's recalls of millions of Chinese-made toys and is "optimistic about 2008" despite an economic slowdown.

But Robert Eckert told Reuters in an interview that higher commodity and labor costs would force the world's leading toymaker to increase prices this year, noting a rise in the currency of China, where it makes a majority of its products.

"I am very optimistic about 2008 for Mattel and the toy industry on the whole," Eckert said.

"I think last year's recall news is behind us and the industry in general ... I just have a real sense of optimism about 2008.

"We are always mindful of what is going on in economies, but if you look at history, the toy industry has always held up very well in tough economic times and I think this will remain the case," he said.

Despite posting a better-than-expected profit for the fourth quarter -- earnings rose to $328.5 million from $286.4 million a year earlier -- operating profits fell as a result of increased costs, notably from the extensive recalls.

Mattel recalled over 21 million Chinese-made toys worldwide in 2007 due to excessive levels of lead paint and other unsafe components, stoking fears of a loss in consumer confidence.
 

Justice Dept seeks change on futures exchanges: report

(Reuters) - The U.S. Justice Department has called for change in financial futures exchanges, saying they should not own the trade clearing business as it inhibits competition, The Wall Street Journal reported on Wednesday.
 

BHP raises Rio bid; no immediate Chinese riposte

(Reuters) - BHP Billiton Ltd/Plc (BHP.AX: Quote, Profile, Research) launched a hostile $147.4 billion bid for rival miner Rio Tinto Ltd/Plc (RIO.AX: Quote, Profile, Research) on Wednesday, ending months of speculation and setting the stage for the world's second-largest takeover.

BHP hopes to sell Rio shareholders its idea of assembling a super miner, supplying the lion's share of the world's industries with millions of tonnes of minerals, but runs the risk of igniting a bidding war with Rio's largest shareholder, state-run aluminum group Aluminum Corp of China (Chinalco).

BHP (BLT.L: Quote, Profile, Research) sweetened its initial approach by 13 percent, offering 3.4 of its shares for every Rio (RIO.L: Quote, Profile, Research) share after a November proposal of three shares for one failed to persuade the Rio board to bless a friendly tie up.

"Rio Tinto shareholders will now decide," BHP Chief Executive Marius Kloppers told reporters. He added: "This is our first and only offer," though he later would not say if that meant it was the final one.

Some analysts doubted the sweetened bid would be enough to win Rio and create the world's third-richest company, ranked behind only Exxon Mobil (XOM.N: Quote, Profile, Research) and General Electric (GE.N: Quote, Profile, Research).

"It's a lot fairer than the offer we've had before, (but) it's by no means a knock-out offer," said Bertie Thomson, a fund manager at Aberdeen Asset Management (ADN.L: Quote, Profile, Research), who holds both Rio and BHP shares.

"Given our market conditions and the outlook, if you look at comparative mergers and acquisitions, it probably is not going to get there," said Ken West, a Perennial Growth Management partner.