While BHP Billiton struggles in its takeover efforts with Rio Tinto, a new twist has emerged on the horizon: China’s state-owned steel companies may be planning to buy a substantial stake in BHP. While some of the talk is being downplayed, here’s why market observers are loath to dismiss the speculation outright.

The reverberations were still being felt in Sydney, London and Beijing on Wednesday following a report carried Wednesday by The Australian newspaper that China’s state-owned steel companies are planning to buy a substantial stake in BHP Billiton. Baosteel, China’s largest steel group, was mentioned as a possible conduit, although according to Reuters some one close to Baosteel’s top management later played down the idea.

But, as Stephen Bartholomeusz of American blog Business Spectator points out, the fact that a state-owned enterprise, Chinalco, with its junior partner Alcoa, was prepared to spend $14bn earlier this year to acquire 12 per cent of the London-listed arm of Rio Tinto, “the latest speculation can’t simply be dismissed”. If the Chinese were to spend the $20bn-plus necessary to acquire a shareholding in BHP equivalent to the Chinalco stake in Rio, “it would cause grief for Wayne Swan [the Australian treasurer] and alarm within the Rio Tinto camp”, he adds.

The Chinalco stake in Rio could be seen as a blocking stake, designed to either prevent the merger succeeding or giving the Chinese disproportionate leverage because of their ability to prevent BHP from achieving full ownership of Rio. BHP countered that buying by dropping its minimum acceptance conditions to 50.1 per cent.

A stake in BHP, however, would do nothing to stop the bid from succeeding. Indeed it would put a floor under the BHP share price – which rose sharply today in the wake of the reports, although a 220 per cent increase in its coking coal prices may also have contributed to the rise – and therefore could actually strengthen BHP’s prospects of success.

In effect, any “raid” on BHP would be a signal that the Chinese believe BHP will acquire Rio and are looking to position themselves as parties of influence on the post-merger share register. It would strengthen the chances of Chinalco accepting the bid.

This entry was posted by Gwen Robinson on Wednesday, April 9th, 2008 at 10:26 and

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