October 22, 2008 / 6:50 AM / 11 years ago

Rio Tinto shares jump on BHP bid rumours

MELBOURNE (Reuters) - Shares in global miner and takeover target Rio Tinto Ltd (RIO.AX) jumped 5 percent in a weak market on Wednesday, swept up by rumours ranging from a sweetened cash bid by BHP Billiton (BHP.AX) to a Chinese counter-bid.

Fund managers were skeptical about all the rumours, including speculation that Rio Tinto was going to come to the bargaining table with BHP Billiton sooner rather than later to discuss its current all-share offer, worth about $70 billion.

BHP Billiton and Rio Tinto spokesmen and bid advisers to the two companies declined to comment on the rumours.

Fund managers played down the likelihood BHP Billiton would launch a cash bid or sweeten its offer with cash so soon.

“As far as putting any credence in it, I would think not. That would be a very bold move given it has yet to receive European Union approval for it,” said Tim Schroeders, a portfolio manager at Pengana Capital.

The European Commission last month extended its review of the deal, setting a Jan. 15. deadline for its final ruling.

“It hardly seems likely now they’re going to say we didn’t need an extra three months,” said Schroeders.

Other fund managers who declined to be named said there was no reason for Rio Tinto to start negotiating with BHP when BHP had yet to secure EU clearance for the deal, still seen as a major hurdle due to vocal opposition from European steel makers.

Another rumour was that Chinalco would make a counter-bid, though Chinalco is state-owned with no listed shares of its own to offer. Its listed unit, Aluminium Corp of China (Chalco) (601600.SS)(2600.HK), is struggling with weak aluminium prices.

Chinalco teamed up with Alcoa Inc (AA.N) in February to buy 12 percent of Rio’s London-listed shares (RIO.L) for about $14 billion.

Those shares have been caught in the collapse of investment bank Lehman Brothers, which holds them in a custodial account. Alcoa and Chinese authorities say they should be able to get the shares back.

Dealers and fund managers said the most likely explanation for Rio Tinto’s share price jump was that a long-only investor had probably switched out of BHP shares into Rio, as Rio Tinto’s discount to the value of the bid had expanded too much.

The discount blew out last week to as much as 28 percent as doubts grew about the bid going ahead, but closed in to 15 percent by the end of trade on Wednesday.

“It looked unsustainable,” Ken West, a partner at Perennial Growth, said of the wide discount.

Rio Tinto shares ended in Australia at A$78.40, up 5.4 percent, while BHP Billiton tumbled 7 percent to A$27.25.

Additional reporting by James Regan, Editing by Mark Bendeich

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