BMO Analyst: BHP's Bid Cancellation In Company's Best Interest

BHP Billiton’s (BHP) decision to withdraw its $66-billion conditional bid for Rio Tinto (RTP) has at least one analyst cheering.

“The cancellation of the bid is good news for BHP shareholders,” says BMO Capital Markets analyst Tony Robson. He adds in a research note that the merger value of the bid “was destructive as the correct ratio is currently estimated to be 2.58 BHP per Rio Tinto share compared to the actual conditional offer at 3.4 BHP shares.” With the bid out of the way, BHP “can now use its strong balance sheet to target other investments,” the analyst said in a note.

While Mr. Robson had believed the bid was likely to fail due to expected opposition from the EU, “the announcement prior to the EU release of its deliberations in mid-January 2009 is surprising.” Still, BHP’s decision is understandable.

He said:

If the EU had deemed that the combined company had concentrated markets then the requirement to sell assets becomes a greater issue at a time when it is difficult to sell assets.

Witness Rio Tinto's inability to sell the Alcan downstream divisions.

As well, Mr. Robson points out that BHP mentions the $43 billion held as debt by Rio Tinto was an obstacle “at a time when asset values are declining.”

The company has disclosed the cost of the bid to date was $450 million, which, says Mr. Robson, “presumably will be written off in the current financial accounts.” Not mentioned in the release was the future of BHP Billiton CEO Marius Kloppers.

Mr Robson has an “outperform” rating on BHP stock, with a target price of A$35.00. BHP shares closed on the Australian Stock Exchange at 26.22, up more than 12%.

Comments

[Canuck2:]

BMO analysts seem consistently wrong.

Just yesterday, again, BMO adjusted their target share price for Kinross Gold to $18.
Todays price already topped that number.

2008 Nov 27 09:09 PM