Rio seen unlikely to counter bid for BHP

The Wall Street Journal, citing unnamed sources, reported Rio was considering a broad array of potential options to fight off BHP, including a so-called Pac-Man defence, selling assets and other moves that could raise shareholder value.

The term Pac-Man defence is a reference to a computer game popular in the 1980s where attackers can become the attacked.

BHP (LSE: - ) shares in London initially jumped as much as 2.4 percent on the speculation it might become a target. By 1353 GMT, they were up 1.13 percent at 1,616 pence.

Rio (LSE: - ) shares also rose, on market talk BHP would raise its offer to 3.5 shares for each Rio share from its initial proposal of three shares. Rio rose 1.5 percent to 5,501 pence, outperforming a 0.12 percent fall in the UK mining index.

A three-for-one offer would be worth $126 billion at current share prices, down from around $140 billion just before BHP unveiled its preliminary proposal last week.

Analysts said Rio was unlikely to counter-bid as expectations are that BHP may sweeten its offer, and it may be difficult anyway for the smaller Rio to pull off such a move.

"At face value you'd say it's unlikely and high risk," said Peter Chilton, analyst at Constellation Capital Management, one of several Sydney-based fund managers BHP chief Marius Kloppers tried to persuade this week to back his idea of a mega-miner, controlling much of the world's supply of raw materials.

Analyst Tom Gidley-Kitchin at Charles Stanley said in London: "If Rio was to do a Pac-Man defence, they would be conceding all arguments on the validity of merging the two companies. They haven't conceded that rationale yet."

RIO INVESTOR BRIEFING

Rio and BHP declined comment on the newspaper report and market talk of a higher offer.

Rio had already planned a general investor briefing for November 26 before BHP announced its planned bid last week and will use the opportunity to give its perspective on the situation, Rio spokesman Nick Cobban said in London.

Earlier this month, Rio Tinto said BHP's three-shares-for-one takeover proposal "significantly undervalues Rio Tinto and its prospects."

"We believe a higher bid of closer to four BHP shares for every Rio share will be required to secure Rio board interest," Gavin Wendt, mining analyst with Fat Prophets in Sydney, said.

UBS, which has acquired a 5 percent stake in Rio, indicated in a report this week BHP could afford to add $27 billion in cash to its all-share offer for Rio.

The value of BHP's proposed bid is around 12 percent lower than the value of Rio's share price, indicating investors expect a higher bid.

Perennial Growth Management partner Ken West said Rio was unlikely to counter-bid for BHP as BHP's growth options in the resource-rich Pilbara region in Western Australia were not as strong as Rio's.

"They're on a clear path with their own options in iron ore," said West. "You combine that with Alcan -- they're pretty happy. Why would you defend yourself by making a bid for BHP? It seems a bit messy."

BHP's Kloppers, who is continent-hopping in coming weeks to press the case for combining the companies to big investors and customers, said this week he was ready for a long fight.

"They were very careful not to give any indication on whether they might raise their offer. They want to keep their options open," said Constellation's Chilton.

($1=A$1.13)

(Additional reporting by Eric Onstad in Johannesburg)

(Editing by Ian Geoghegan/Sue Thomas)