Rio's Riversdale bid may rest on where CSN and Tata jump

Rio's Riversdale bid may rest on where CSN and Tata jump Bryan Frith From: The Australian February 18, 2011 12:00AM Increase Text SizeDecrease Text SizePrintEmail Share

Add to DiggAdd to del.icio.usAdd to FacebookAdd to KwoffAdd to MyspaceAdd to NewsvineWhat are these?RIO Tinto has finally picked up acceptances for 1 per cent of its takeover target Riversdale Mining but that only serves to emphasise how slowly the $3.9 billion bid is travelling.

The $16-a-share cash bid opened on January 13 and was originally scheduled to close today, after five weeks, but Rio has been forced already into one extension.

The bid will now close on March 4, an extension of two weeks, unless it is extended again.

Along with last week's extension, Rio established an institutional acceptance facility （IAF）, into which institutional holders can tender their shares and the trustee of the facility will accept those shares when Rio has satisfied the minimum acceptance condition of 50.1 per cent and declared the offer unconditional.

It is now more than three months since Riversdale confirmed it was in takeover discussions with Rio （at a mooted offer price of $15 a share） and more than two months since the board unanimously recommended an offer of $16 a share, a 46 per cent premium to Riversdale's one month volume weighted average price before the talks between the parties became public.

Rio began with its foot on 14.9 per cent of Riversdale, through call options obtained from major shareholder, the hedge fund Passport Capital, and three Riversdale directors: executive chairman Michael O'Keefe, managing director Steve Mallyon and chief financial officer Niall Lenahan.

On Wednesday Rio advised it had received acceptances for 1 per cent of Riversdale, taking its relevant interest to 15.9 per cent.

It revealed also that no shares have as yet been tendered into the IAF. That is a surprise because the IAF represents a free option for the institutions as shares tendered can be withdrawn up until the offer is declared unconditional, whereas acceptances, once made, cannot be withdrawn until the offer has been extended by more than a month.

It appears the shareholders, institutional and retail, are waiting to see which way the two major shareholders jump. They are India's Tata Steel and Brazil's second largest steelmaker Companhia Siderurgica Nacional.

Until recently, CSN owned 16.29 per cent of Riversdale but created speculation when it spent more than $250 million to build its stake to the bid threshold of 19.9 per cent, paying between $15.90 and $16 a share.

And it is perhaps not widely realised that at the end of the month Tata would be free to acquire a further 3 per cent of Riversdale if it wished, under the "creeping takeover" exemption.

CSN has more than enough cash to fund an offer for Riversdale but is considered an unlikely bidder because it is a steel company and does not have the operational capability to develop Riversdale's coal projects in Mozambique.

The same applies to Tata; moreover its balance sheet is capacity constrained.

If a bid is ruled out, CSN's motivation could be either to be in a position to help block Rio from securing control of Riversdale or to increase its leverage, either to persuade Rio to sweeten its offer price and/or to improve its prospects of securing an offtake agreement with Riversdale if Rio succeeds.

A blockage strategy also appears unlikely because that would be likely to result in a significant fall in the price of Riversdale shares, although perhaps not as far as the $10 at which they were trading before Rio came on the scene.

CSN is unlikely to have outlaid $250m acquiring Riversdale stock at up to $16 and employ a strategy that would reduce Riversdale's share price.

CSN, and no doubt Tata, would be aware of the recent fate of Macarthur Coal, which sought to play off two bidders, Noble Group and Peabody, only to end up with no offer, and its share price is now selling well below the proposed bid prices.

Moreover, development of Riversdale's coking coal projects （Benga, where stage one development is already under way with none other than Tata as a joint-venture partner, Zambeze and east Tete） are likely to cost at least $US6 billion （$5.98bn） to bring into production and Rio is one of very few companies with the capability to fund such a requirement.

That leaves leverage as the most likely reason for CSN recent share purchases.

It is worth recalling that when CSN bought its initial 16.3 per cent in November 2009 from the late Ken Talbot, for $190m, or $6.10 a share, it said it viewed the acquisition as the first step towards becoming self-sufficient in coking coal, a raw material for steelmaking. Similarly, Tata went into Riversdale to secure supply of raw material.

Under the Benga joint venture, Tata is entitled to buy 40 per cent of the coking coal output and it is said to be reluctant to quit its stake unless it can have clarity over supply going forward.

Rio is thought to be talking to both parties.

Given that Tata and CSN already own 44 per cent of Riversdale, it is unlikely it would be able to satisfy its 50.1 per cent minimum acceptance condition unless one or the other accept for their stake, or that both accept for some of its holdings.

If Tata, and/or CSN do want to retain a stake, that would increase the likelihood that Rio may secure majority ownership but fail to satisfy the compulsory acquisition criteria.

If that were to happen, Rio may consider a mop-up bid at a later stage to secure full ownership.

In the meantime, Tata and CSN appear to be playing a waiting game, in the hope the other will blink first. And adding grist to the mill, there's bad blood between Tata and CSN.

It dates back to a bitter takeover duel between the two groups in 2006 for control of the Anglo-Dutch steel group Corus.

Tata kicked off the bidding with an offer of pound stg. 4.55 a share, which valued Corus at $8bn. CSN topped it with an offer of pound stg. 4.75 a share before Tata offered pound stg. 5 a share but CSN came back with a scheme proposal at pound stg. 5.15 a share.

Curiously, the Corus board recommended both bids.

London's Takeover Panel then stepped in and conducted a knock-out auction process between the two bidders, and after nine rounds Tata prevailed, topping CSN's final offer of pound stg. 6.03 a share with a bid of pound stg. 6.08 a share.

That valued Corus at $12bn, a 50 per cent increase on the initial offer.

Relations between the two groups are said to have been strained since then.

Rio must advise by Thursday whether it intends to again extend, or declare the offer unconditional or allow it to close on the scheduled March 4 date.

（SOURCE FROM:the australian）