BHP raises Rio bid; no immediate Chinese riposte

By James Regan

Combined, BHP and Rio would create the world's third-richest company, with a market capitalization eclipsed only by Exxon Mobil and General Electric .

BHP sweetened its initial approach by 13 percent, offering 3.4 of its shares for every Rio share after a proposal of three shares for one in November failed to persuade the Rio board to agree to a friendly merger.

"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 , who holds both Rio and BHP shares.

A report in Britain's Times newspaper on Wednesday said Chinalco and Alcoa were preparing a counter-bid for Rio, but sources familiar with the situation told Reuters the Chinese were in no rush to make a next move.

"Why does BHP really want to tempt the dragon? Chinalco has already made the message clear: they really do not want to see a merger," said Geoffrey Cheng, director of equity research at Daiwa Institute of Research (H.K.) Ltd. "You're not going against a corporation. You're going against a nation."

Shares in BHP, which also posted a 2.4 percent dip in first-half profit to $6.017 billion, fell 7.4 percent to A$36.69, while Rio was down 1 percent to A$126.20.

Some analysts doubted the sweetened bid would be enough to win Rio.

Kloppers said Rio had refused to discuss a merger, but he believed the offer still held widespread support among Rio shareholders, 60-70 percent of whom also hold BHP shares.

BHP said Rio shareholders would hold 44 percent of a merged entity, compared with 36 percent in the initial approach. The offer equates to a 45 percent premium to Rio's stock price in November before BHP first raised the idea of a union.

Rio, which has argued it is better off as an independent company, said in a statement it was considering the offer, but advised shareholders not to take any action.

Kloppers said the Chinalco/Alcoa share raid at Rio was "just another factor" to contend with.

"The offer should be enough to get BHP talking to Rio," said Rob Patterson, managing director of Argo Investments, a fund manager. "Raising the offer to that degree probably makes sense."

In 2006, Brazil's Vale bought Canada's Inco for $17 billion, paid for with a revenue boost stemming from high world iron ore prices. Vale has also said it was in talks with Anglo-Swiss rival Xstrata about a takeover, a deal that analysts calculate could top $100 billion.

(Additional reporting by Sonali Paul and Victoria Thieberger in MELBOURNE, Tom Miles and Nao Nakanishi in HONG KONG and Eleanor Wason, Laurence Fletcher and Eric Onstad in LONDON; Editing by Ian Geoghegan)