Q+A: How does BHP-Rio iron ore jv stack up for investors?

MELBOURNE (Reuters) - Global miners Rio Tinto and BHP Billiton are to combine their Australian iron ore operations, six months after BHP dropped a hostile takeover bid for Rio Tinto.

BHP will pay Rio $5.8 billion to raise its stake in a joint venture to 50 percent, roughly valuing the entire venture at $116 billion. Is that better for shareholders than BHP's 3.4-for-1 all-share takeover offer, which at one point -- before credit crunch and commodity market slump -- was valued at $193 billion?

IS BHP GETTING A BETTER DEAL THIS TIME?

BHP Billiton looks better off now as putting the iron ore operations together to reap $10 billion in savings was the centerpiece of its takeover plan last year. With this deal, it secures the benefits without taking on Rio's $38 billion in debt or taking on its aluminum business, which is caught in a slump.

"I think it's a very clever deal," said John Sevior, head of Australian equities for Perpetual Investments, the seventh-largest shareholder in Rio Tinto Ltd.

"It's cleaner," said Peter Chilton, an analyst with Constellation Capital Management, which has shares in both Rio and BHP. "They get a stake in the assets they really want. And BHP didn't rule out a merger further down the track."

WHAT'S THE BIG WIN FOR BHP AND ITS SHAREHOLDERS?

BHP Billiton would have had to spend billions of dollars to expand its Port Hedland export terminal in Western Australia to accommodate growing iron ore production. Now, it will have access to Rio Tinto's ports.

BHP shareholders can share in the greater growth prospects in Rio Tinto's iron ore assets.

"On the face of it, it looks like they've paid a good price," said Constellation's Chilton.

WHAT'S THE DOWNSIDE FOR RIO SHAREHOLDERS?

The dilution from the massively discounted $15.2 billion rights offer, priced at A$28.29 in Australia -- a 58 percent discount to Rio's Thursday close -- and 1,400 pence for its London-listed shares -- a 49 percent discount.

But shareholders wanted a rights issue, instead of being diluted by Chinalco. And it's cheap.

"It's very good for BHP, and for Rio it's fair for their shareholders. They get an opportunity to participate in the capital raising at a very good price. It's not just a special deal for one shareholder," said Perpetual's Sevior.

WHAT'S THE RIO UPSIDE?

It cuts $15 billion off its $38 billion debt. That, and not paying a dividend for the 2009 first half, shores it up for future growth options.

Rio shareholders will reap the synergies from the joint iron ore operations and hold on to benefits from the Escondida copper and Rio's bauxite assets, which would have been whittled down if Rio had sold minority stakes in those assets to Chinalco.

"At the end of the day, the real attraction from this deal is in the cost savings (and) capital efficiencies by operating the two iron ore businesses together. Those gains are shared by both BHP and Rio shareholders," said Neil Boyd-Clark, portfolio manager at Fortis Investment Partners, which owns shares in both.

WAS KEEPING CHINA OUT A PRIORITY FOR BHP?

If Chinalco had increased its equity stake in Rio Tinto and secured a 15 percent stake in Rio's Hamersley iron ore assets, it would have been much harder for BHP to line up the joint venture it has been dreaming about for the last 10 years.

(Reporting by Sonali Paul; Editing by Mark Bendeich & Ian Geoghegan)