Rio Tinto Plummets In Overreaction to Failed Takeover - Canaccord Adams

Shares of Rio Tinto Ltd. (RTP) plummeted on Tuesday after BHP Billiton Ltd. (BHP) dropped its massive takeover bid. Damien Hackett, an analyst at Canaccord Adams, called Rio's share price drop a "big over-reaction" to its perceived financial risk

The risk is tied to Rio's net debt of roughly $42-billion, most of which is a holdover from last year's acquisition of Alcan Inc. (AL). Mr. Hackett noted that the interest burden is well below 3%, meaning an annual interest charge of around $1.26-billion. That does not seem too punitive for a company with an estimated $23.8-billion of EBITDA this year and $19.8-billion next year, he noted.

He wrote in a note to clients:

In our view, Rio Tinto's balance sheet is not unduly stressed in the commodity price environment we are projecting. On our numbers, the entire $42-billion of borrowings can be paid down by 2013 without recourse to asset sales.

As for BHP, Mr. Hackett figures that dropping the bid is more of a tactical manoeuvre rather than a strategic change of direction. His view is that BHP thinks the upcoming economic environment will be much tougher for Rio than it will be for BHP because Rio has so much more debt as well as low-margin, downstream aluminum businesses.

He wrote:

BHP Billiton could revisit this issue after 12 months and would be free to make an offer [for Rio Tinto] at a more 'market-appropriate' price if so inclined.

Mr. Hackett rates Rio Tinto a "buy" with a price target of £26 a share, and he rates BHP a "hold" with a target of £11 a share. He upgraded Rio and downgraded BHP on Wednesday, based on their price moves after the takeover offer was dropped.

Comments

[User 307989:]

the problem is that I live in the USA and BHP news of out of deal was in the middle of the night in the USA and when I woke up at 630 AM NYSE time, RTP already already down from $145 to 110---I didnot even have a chance to salvage my $35,000 loss!

2008 Nov 27 07:05 AM

[cubanstockp...:]

User 307989
Make your money shorting this stock. Mr Hackett should be renamed to Mr. Hack His Ebitda is wrong based on the over 300% decline in prices of Steel, 200% in copper, Aluminum is tanking. And RTP needs to come up with 9 Billion by October and RTP already described they need to sell off their assets to come up with the money. The problem is RTP bought at the height of the commodity bubble a few months back.


On Nov 27 07:05 AM User 307989 wrote:

> the problem is that I live in the USA and BHP news of out of deal
> was in the middle of the night in the USA and when I woke up at 630
> AM NYSE time, RTP already already down from $145 to 110---I didnot
> even have a chance to salvage my $35,000 loss!

2008 Dec 02 11:01 AM