rios bid undervalues asset

Rio under pressure to lift $3.9bn Riversdale offer Barry FitzGerald
December 24, 2010

RIO Tinto's well-flagged $3.9 billion cash takeover bid for Riversdale Mining has come under pressure on expectations Rio will have to increase the offer to secure acceptances from key shareholders in the emerging coking coal group.

Suggestions the highly strategic nature of Riversdale's Mozambique coal interests could flush out counter-bids also put the Rio offer - increased from the $15 a share in earlier talks with Riversdale to $16 a share - on the back foot.

The increase in the offer has secured Rio a pre-bid agreement, giving it a call option over 14.9 per cent of Riversdale, with key Riversdale directors (1.3 per cent) and institutional shareholders (13.6 per cent) providing the stock.

Rio also has a matching right in the event of a competing bid and would receive a ''break fee'' of $37.8 million in certain circumstances should it not win the day. Riversdale cannot solicit competing proposals.

But the market still strongly indicated its belief Rio would struggle to meet its minimum acceptance condition of 50 per cent, or ward off potential counter-bidders, without an increase in the $16-a-share bid price.

Riversdale shares closed 27? higher yesterday at $16.57. Hartleys senior resources analyst Andrew Muir said it was likely the Rio bid was just the ''opening shot in a bidding war for the company to gain access to the world-class resources of its Mozambique projects''.

His valuation of Riversdale is $18.80 a share and ''far more than $20 a share'' once key infrastructure issues (rail, barging and port access) with one of Riversdale's projects (Zambeze) are solved.

''This bid gives Riversdale credibility that it is sitting on a world-class coal asset,'' Mr Muir said.

''However, we believe the bid undervalues the asset.'' He expected the most likely competing bid to come from Tata Steel. Other potential bidders included Xstrata, CSN and Vale, he said.


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