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BHP Billiton’s (BLT) proposed takeover of Rio Tinto (RIO) would involve BHP offering three of its own shares for every Rio share. One source “with knowledge of the talks” told The Times that the deal was “a long way away from the kind of value that would be sensible.”
But while Rio might not like the price, the deal does make sense. A combined company would mean lower overheads, “not to mention future gains from not needing to bid against each other in auctions,” says Edward Hadas on Breakingviews.
The combined group would be extremely powerful in terms of clout in the market. It would have a 36% share of the seaborne iron ore market, says Hadas. Meanwhile, Patrick Hosking in The Times also points to the fact that “Rio is huge in bauxite and aluminium, while BHP is more dominant in coal.” In fact, a Rio Billiton, or BHP Tinto, or whatever they ended up calling it, would “by some measures” also be supplying about a third of the coal market.
Of course, that might be a problem in itself. The world’s steelmakers won’t be too happy for one – “for such a large portion of two such essential raw materials to come from just one source, could be explosive, politically,” says Hoskings.
However, BHP is apparently confident that it can make the deal work. And at the end of the day, it’ll all come down to price, says Hadas – and if BHP can make the right offer, “the other issues are likely to melt away.”
Now one thing that may well be lurking in the back of MoneyWeek readers’ minds is the fact that the two other biggest deals in the world – Vodafone / Mannesman, and Time Warner / AOL – were by no measure successful. Also, the Vodafone deal in 2000 pretty much signaled the top of the tech boom. Could BHP / Rio be doing the same for the commodities boom?
We don’t think so. For reasons we’ve argued before, the commodities supercycle has a long way to run. That doesn’t necessarily mean there won’t be pull backs in the meantime – but we’d still be holding onto BHP and Rio – at least until we get a clearer view of how this bid is going to profgress.
Meanwhile, it looks like we have some evidence that the art boom is finally over. Shares in auctioneer Sotheby’s dived by a third yesterday as an auction in New York failed to live up to even the worst expectations. The auction raised just $270m, far below the $355m that had been the low end of Sotheby’s forecasts.
According to The Times, 20 of the 76 lots on offer didn’t sell at all, while those that did, “went under the hammer for well below expectations.” The art world is trying to put a brave face on it, with Sotheby’s David Norman suggesting that the poor showing wasn’t evidence of a correction, but rather “resistance to the aggressive estimates.”
However, with sub-prime continuing to spill over into the US economy, hedge fund managers can’t be in the mood to spend their endangered bonuses on over-priced assets that are costly to insure and maintain.
Art pundits like to argue that international buyers will prop the market up – it’s very like the ‘decoupling’ theory that currently has the markets entranced. The US doesn’t matter any more, they believe. But even if this is true, basic economics dictates that if you take out one group of buyers, reducing demand, while supply remains constant, then the rest won’t feel the need to offer as much money.
So record-breaking sales are a thing of the past for now. And as always, when people – even fantastically rich people – see prices falling, they suddenly lose a lot of the interest they once had in an asset class, regardless of how cultured it once made them look. After all, having an expensive painting on your wall isn‘t much to shout about if all of your guests are thinking – “You paid how much? Are you stupid? Everyone knows the art market is going down the toilet.”
Expect to see some Andy Warhols going cheap at an auction near you soon.
Turning to the wider markets…
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After a volatile day, London’s benchmark FTSE 100 index closed just three points lower yesterday, at 6,381, as gains in the mining sector offset further falls in the banking sector. Rio Tinto was the day’s stand-out performer, adding over 21%. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was 51 points lower, at 5,631. However, the Frankfurt DAX-30 climbed 19 points to close at 7,819 on better-than-expected earnings for German companies.
Across the Atlantic, the Dow Jones suffered a 200-point drop early in Thursday’s session after Fed Chairman Ben Bernanke outlined the precarious state of the US economy. However, a late surge for financials saw the index pull back most of its earlier losses to close down just 33 points, at 13,266. The Nasdaq tumbled 52 points to end the day at 2,696 as poor Q3 losses for bellwether stock Cisco prompted declines across the technology sector. The S&P 500, meanwhile, closed a fraction of a point lower, at 1,474. See: US close.
In Asia, Japanese stocks fell to near a three-month low this morning after Mizuho Securities, part of Mizuho Financial Group, revealed its subprime losses could total as much as 100 billion yen. The Nikkei closed down 188 points, at 15,583. In Hong Kong, the Hang Seng was just 23 points higher, at 28,783.
Crude oil continued to climb this morning, and was last up a further 66c to $96.12. In London, Brent spot was at $93.65.
Spot gold peaked at $838.90 this morning, before slipping back to $833.80. And silver had risen to $15.43.
Turning to the foreign exchange markets, the pound hit a new 26-year peak against the dollar of $2.1144 this morning, before falling back to 2.1092. The pound was at 1.4345 and the dollar was at 0.6801 against the euro. And the dollar was at 112.51 against the Japanese yen.
And in London this morning, owner of London’s Magic radio station and publisher of Grazia magazine, Emap, declared itself ‘encouraged’ by interest since it put itself up for sale in July. Whilst no-one has made a bid for the whole company, there has been ‘good interest’ from private equity and competitors for all parts of the business. Shares were up by as much as 2.7% so far today.
Finally, our recommended articles for today…
The self-serving financial ‘services’ industry
– The £160m pay-off to failed Merrill Lynch chief Stan O’Neill has highlighted the obscene sums pocketed by individuals working at investment banks. To find out why, although this situation is far from fair and most likely encourages aggressive lending, it may prove beneficial to the rest of us, see: The self-serving financial ‘services’ industry
The real carnage may be still to come
– This is proving to be a ‘kitchen sink quarter’ in which banks attempt to get all their write-offs and losses out of the way at once. But whatever they may want us to believe, we’re not out of the woods yet. For more on the scale of the banks’ difficulties, click here: The real carnage may be still to come