Withdrawal of BHP-Rio Tinto Bid Is Biggest Ever

Global economic reversal and plunging commodity prices torpedo a hostile $68b stock deal that at one point had been worth $188b.
Roy Harris and Stephen TaubNovember 25, 2008

The deterioration of the global economy claimed its biggest victim in the potential deal arena, as BHP Billiton Ltd. dropped its 10-month, $68-billion hostile effort to buy Rio Tinto Ltd. The move confirms the growing pessimism in industry about how soon the plunge in commodity prices, as well as financial conditions in general, will turn around.

Thomson Reuters calculated that — based on its one-time stock value of $188 billion — the proposed transaction is by far the largest ever to be withdrawn.

This morning, Rio Tinto shares plunged 34 percent on the news, while BHP’s London-traded shares surged 17 percent.

“We have previously said that similar cultures and the overlap of key assets and infrastructure make this a compelling combination,” said Marius Kloppers, chief executive officer of BHP Billiton, the world’s biggest mining company. “Recent global events and associated falls in commodity prices have, however, altered risk dimensions.”

Commodity prices, including the price of copper, have fallen 43 percent in the past 12 months and 23 percent in the past month alone.

The original value of the all-stock bid by Melbourne-based BHP Billiton, which in February had offered 3.4 BHP shares for every share of Rio Tinto, was about $147 billion. BHP Billiton stock values surged for a time, before being punctured by global economic reversals and plummeting commodities prices.

Based on a deal value of around $188 billion on the day of the announcement, Thomson Reuters calculated that the withdrawal of the offer surpasses the previous largest cancellation: MCI WorldCom’s 2000 abandonment of its offer for Sprint Corp., valued at $125.47 billion.

BHP Billiton’s Kloppers said that the additional debt incurred from a merger, plus the difficulty of divesting assets, has increased the risks to shareholder value “to an unacceptable level.”

BHP Billiton noted that it had received clearance from the U.S. Department of Justice and the Australian Competition and Consumer Commission for the merger. However, it said that the European Commission would have required divestments in iron ore and metallurgical coal to deal with its concerns. It added that “in the normal range of economic conditions,” it would have been prepared to offer remedies which we believe would have been both acceptable and manageable.

Given the current economic circumstances and uncertainty regarding its ability to achieve fair divestment values in the required time frames, though, the former suitor believed that these remedies would contribute to the cost and risk of the transaction. “Against this background BHP Billiton will not offer any remedies to the European Commission antitrust authorities, and BHP Billiton expects that without remedies European Commission clearance will be withheld,” it added.

The enormous deal had raised global concerns that it would have left more than two-thirds of the world’s iron ore in the control of two companies, with the other being Companhia Vale do Rio Doce of Brazil. Earlier in the year, of course, the surging commodities market reflected a seemingly endless increase in demand for metals, led by spiraling production in China.

BHP Billiton this morning hinted that it might still look for other acquisitions, noting that its balance sheet remains strong. At the same time it announced the withdrawn offer, it said it would pump $4.8 billion into a capacity expansion in Western Australia.

Rio Tinto commented in a statement that it “will continue with its strategy of operating and developing large scale, long life, low cost assets to generate significant value for shareholders.

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