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Iron men fight for control of the earth

Roger Agnelli, the urbane Sao Paulo-born chief executive of Brazilian mining giant Vale, knows how to throw a party. In 2003, Vale do Rio Dolce (Valley of the Sweet River), as it used to be known, sponsored the Rio de Janeiro carnival.

The company hired the most exclusive hospitality boxes overlooking the ‘sambadrome’ parade strip. There Agnelli mingled with hundreds of guests - the cream of Brazil’s business elite - as they swigged champagne and watched scantily clad dancers parade past.

Today, Agnelli has ringside seats to an altogether different - and more critical - contest. Four of the world’s largest mining groups are in the ring. Run by two South Africans, an American and the Brazilian Agnelli, they are slugging it out for the right to declare themselves the biggest beasts in their industry.

In one corner is Swiss-based group Xstrata, run by South African veteran dealmaker Mick Davis, known as ‘Big Mick’ to his friends. Agnelli has Davis’s company in his sights; bankers say Vale is days away from making a takeover bid worth well over $80bn. In the other corner is mighty Rio Tinto, which has been conducting on-off takeover sparring for the past 10 years with its Australian rival BHP Billiton. BHP’s South African boss, Marius Kloppers, has spent the best part of the past year plotting a knock-out $130bn takeover blow. If successful, he would end up running a combined group with an eye-watering stock-market value of more than $350bn.

So far Rio’s New Jersey-born chief executive, the more cautious Tom Albanese, has spurned Kloppers’s advances. But the Takeover Panel in the UK - where both companies are listed - has ordered Kloppers to make a formal offer by Wednesday or go away for six months. Analysts say that if he is really serious, he must press the button now or forget it altogether.

But on Friday morning, the plot thickened further when another player entered the stage - inevitably, perhaps, from China. State-owned mining group Chinalco announced that, with American firm Alcoa, it had bought a 12 per cent stake in Rio Tinto for $14bn.

Xiao Yaqing, president of Chinalco’s publicly listed subsidiary, claimed in a press conference that it was a ‘coincidence of timing’ that the astonishing dawn raid took place just days before BHP’s Wednesday deadline. Chinalco also said it might make a takeover bid for Rio in the future.

The mining industry is known for its tough, swashbuckling characters. But even the most testosterone-fuelled boss has never attempted any kind of acquisition on this scale. Both deals are the stuff of superlatives.

If Vale bags Xstrata, it would be the largest Brazilian takeover of a foreign company. If BHP consummates its dalliance with Rio, it would be the largest takeover in the mining sector by some distance: the largest to date was Rio’s $44bn acquisition last year of Canadian rival Alcan. A BHP-Rio tie-up would also rank as the world’s second-largest deal ever, behind Vodafone’s ill-fated $150bn-plus acquisition of German company Mannesmann almost a decade ago. Chinalco’s $14bn share raid on Rio is also China’s largest ever foreign investment.

These deals are even more audacious given the backdrop of the credit crunch, which has made the necessary financing so scarce - and expensive. But an even bigger threat - at least for BHP - is the appearance of the Chinese, who having bought a large stake in Rio Tinto, could scupper Kloppers’s grand plan.

Regulators could also decide that his takeover of Rio Tinto would create a company that is simply too powerful. Indeed, a combination of the two would control more than a third of the world’s seaborne exports of iron ore, the most commonly used metal. Critics say a takeover would make it easier for suppliers to increase prices, and industries that rely on iron ore are getting anxious. So why are Kloppers and Agnelli sticking their necks out - and can they pull off two of the most audacious deals in takeover history?

Mining companies have been enjoying boom times thanks to sky-high metals prices. Between 2006 and last summer, prices more than doubled, according to ABN Amro, increasing the cost of everything from construction to consumer goods and manufacturing. The boom has swelled mining companies’ war chests and comes at a time - as in the oil industry - when the easiest mineral deposits have already been mined. As companies struggle to find new reserves, and with record profits burning a hole in their pockets, it’s no wonder that covetous mining bosses are on a spending binge.

Under Agnelli, who took the helm in 2001, Vale’s rise has been meteoric. It was privatised in 1997 as an unwieldy giant, inheriting big debts and a rag-bag of businesses that included fertilisers, paper and pulp, and forestry.

Having streamlined its operations and snapped up around 20 smaller competitors in Brazil, as well as Canada’s nickel miner Inco for £10bn, by last year Agnelli had turned it into the world’s second-largest miner and biggest producer of iron ore. But Agnelli, who frequently cites the company’s ‘Brazilian soul’, is not content to stop there. In November, he threw down the gauntlet to BHP, telling investors that he would turn Vale into the world’s biggest mining operation within five years.

It was not an idle promise. By his own reckoning, last year he racked up 1,000 hours of flying time, much of it in the company’s executive jet, visiting Vale’s increasingly far-flung empire, and no doubt plotting the next deal.

His trips to the capital Brasilia have also been frequent as he keeps his political masters informed of his plans. The Brazilian government controls about half of Vale’s shares. Ten days ago, he dined with the President Luiz Inacio Lula da Silva at the same time as Vale was scrambling to arrange $35bn of debt financing for the Xstrata bid. The president later denied that they had discussed the takeover of Xstrata.

Charles Kernot, an analyst from Seymour Pierce, explains why Agnelli wants Xstrata: ‘There are other companies Vale could acquire, but buying Xstrata would catapult them into the mega-league in one swoop.’

It’s not as if Xstrata’s Davis is a passive spectator. In five years at the helm, his canny wheeler-dealing has seen the company’s share price increase tenfold. But bankers say he is ready to listen to offers for his company - and that is a sign, they believe, that he thinks we are at the top of the metals market. What’s terrifying Davis, says John Mothersole from analyst firm Global Insight, is that the current wave of consolidation sweeping the mining sector will pass Xstrata by. ‘The company is in a rush to extract whatever value it can while there are still buyers out there,’ he says. ‘It’s like a game of musical chairs. No one wants to be left standing when the music stops.’

Mothersole adds that this takeover frenzy may lead to both Kloppers and Agnelli overpaying for their prizes. ‘These companies feel compelled to make these offers now that they have staked their future on the global mining model,’ he argues. ‘But the frenzy of takeover activity may blind them to the underlying value of these combinations. They may look back in a couple of years and think they paid too much.’

Not everyone is clamouring for Vale to buy Xstrata - certainly not in Brazil, where capitalism, particularly the global model espoused by the likes of Agnelli, has shallow roots. In a country with a yawning gulf between rich and poor, where only the privileged few own shares, many view Vale’s responsibilities as going far beyond paying dividends to its shareholders.

Last autumn, landless farmers in impoverished northern Brazil ambushed the company’s cargo trains several times, briefly taking Vale workers hostage and shutting down Brazil’s major iron ore railway for days, cutting exports. The farmers called for a renationalisation of Vale and the redistribution of Brazil’s mineral wealth.

Novarck de Oliveira, a union director who has worked for Vale for nearly 25 years, says: ‘In the race to become the world’s biggest, the world’s richest miner, Vale may forget about what needs to be done in its own backyard.’ He questions why, for example, it should pay its inherited Canadian workers far more than its Brazilian employees. ‘The salary rises Vale has offered have been paltry, hardly keeping up with inflation.’

The takeover battle between Rio’s Albanese and BHP’s Kloppers is a different affair. Both companies are based in Australia and are bitter rivals. BHP’s takeover plan announced in November proposed swapping three BHP shares for each Rio share; no money was to change hands. Albanese dismissed this out of hand and has so far refused to meet the BHP board. In December he went further, claiming the plan was ‘dead in the water’. This seems a little premature.

Both sides have been frantically briefing shareholders and the media for the past three months, explaining why they have a more promising future than their rival - and are worth more. BHP, many of whose operations, particularly in Australia, overlap those of Rio, claims a takeover would result in savings of $3.7bn a year. BHP could still decide to sweeten the offer this week with cash, or offer 3.5 shares for each one of Rio’s.

Analysts certainly do not think Kloppers will give up without a fight and expect BHP to table an offer before Wednesday’s deadline. Kernot says Kloppers knows that now is the time to strike: ‘He could choose to walk away and come back in six months. But then I think we would be looking at the US coming out of recession and China still growing, so Rio could be more expensive.’

But there is far more to this deal than two chief executives’ egos, or the making of merger history. A takeover of Rio by BHP would give Kloppers a vice-like grip on the world’s iron ore exports, a prospect which is provoking angst in company boardrooms from the West Midlands to Beijing.

Iron ore is the principal ingredient of steel. Rio and BHP combined would control about 36 per cent of the world’s seaborne exports of that ingredient. Vale is the world’s largest iron ore producer, but most of this is consumed in the Americas, with most of the remainder going to Europe. Steelmakers complain that Vale and a combined BHP/Rio would effectively form a duopoly in iron ore.

Peter Ullathorne is director of steel stockist William King in West Bromwich. With its associated companies, it supplies steel to manufacturers of domestic appliances and Japanese car factories in the UK and Europe, handling around 500,000 tonnes of steel per year. ‘Steelmakers have to keep their furnaces going, which means they’re under pressure to make a settlement for iron ore,’ he says. ‘If you have only got two main competitors, it does not take too much for them to say ‘we want a bigger rate of return’ and ratchet up the price.’

China, which produces more steel than anyone, and other Pacific Rim countries, could be hardest hit by a Rio takeover. Because of their proximity to Australia, where Rio and BHP’s biggest iron ore mines are located, they would rely on the combined entity for an even higher proportion of their imported ore.

So worried are the Chinese that national steelmaker Baosteel considered mounting a counter-offer for Rio to scupper Kloppers’s plan - and now Chinalco has made its surprise move.

Xiao intimated that Chinalco does not have the money to buy a larger stake and analysts say a full-blown takeover offer for Rio by any state-owned entity would be unlikely because China does not yet have the necessary financial muscle. But Chinalco has made it significantly more complicated for BHP to pull off the takeover of Rio. Its stake is not large enough to block a deal, but the prospect of BHP inheriting such a large hostile shareholder is not attractive.

China could also yet mount a different - and just as extraordinary - challenge. It has just passed its first proper competition law, and it has emerged that in recent days officials from the Chinese embassy in London have contacted leading law firms to discuss how to block a BHP deal on anti-competition grounds.

The prospect of China, hitherto infamous in the field of corporate law for its lax approach to intellectual property statutes and flouting of international corporate regulations, blocking a Rio takeover on legal grounds is extremely ironic. But it could happen. One competition lawyer says: ‘There would be no precedent, and it’s not clear what jurisdiction the Chinese have. But if China argues that a merger would affect its domestic market, it might have a case.’

Apart from any legal challenge from the Chinese, a Rio takeover is also expected to face a lengthy investigation by the European Commission. That would take at least nine months, and could force BHP to sell assets as a condition for being given the green light.

Of the two takeovers, analysts agree Vale’s is the more likely to go ahead. If Kloppers can come up with a good enough offer for Rio’s board and its shareholders, he will immediately face a bigger challenge: China. Like so much in business and politics these days, the fate of the world’s second-largest takeover, it seems, will be decided in Beijing.