The sun sets on BHP's bid
Nov 25th 2008
From Economist.com
An audacious attempt by BHP Billiton to get control of Rio Tinto has fallen apart
BHP BILLITON’S boss, Marius Kloppers, wasted no time leaping into action when he took charge a little over a year ago. In November 2007, barely a month into his tenure as chief executive of the Anglo-Australian mining giant, he began making unwanted advances to Rio Tinto, a vast rival, in the form of a proposed all-share bid that was valued at some $140 billion. After a year of politely but firmly reiterating the merits of the huge deal and several months into painstaking antitrust investigations by the European Union, however, his company has sprung another surprise, deciding to drop its bid, now valued at $66 billion.
The giant mining company admits that the crippling credit crisis and a deteriorating world economy mean that now is not the right time to pursue one of the world’s biggest takeovers. So a year of effort and $450m of shareholders’ cash, the cost of dropping the chase of Rio, have yielded nothing. The decision to quit may pain the ambitious Mr Kloppers, but the reasons for doing so had been mounting steadily.
A year ago commodities were bubbling. But worsening economic times have seen commodity prices plummeting from record highs. Mining firms’ share prices have tumbled too. Few mining bosses were ready to claim that their industry had overcome its customary cyclicality. Yet none would concede that the source of their new prosperity, China’s booming economy, was in any danger of losing its appetite for their wares. In fact a looming world recession and a modest slowdown in China have sent commodity prices into a tailspin and severely crimped cashflow for both firms.
As BHP’s bid for Rio progressed rumours swirled of other planned takeovers by big mining companies made bullish by high prices and bumper profits. Talk abounded about Vale and Xstrata; Xstrata made a tentative move for Lonmin and other chatter suggested that a Chinese bid might emerge for Rio. But the price of targets was commensurately high so none of the mooted deals materialised. Now the last bid on the table has dropped off too. BHP blamed the credit crisis in particular. Rio is loaded with debt (around $40 billion) from its acquisition of Alcan, a Canadian aluminium company, in 2007. BHP’s debts are more modest at $6 billion. Had a merger gone ahead BHP had a loan facility in place with its bankers but may have feared that it would face severe difficulties in the future refinancing Rio’s additional debt.
The world’s steelmakers will rejoice. Customers had feared that a combined firm would use its market power to run up prices. The deal was predicated on iron ore, where Rio and BHP occupy the second and third spots respectively behind Brazil’s Vale, the world biggest supplier. The main cost savings would have come through consolidating operations in Australia.
The European Union’s competition authorities, the regulators most concerned about the deal, are in the throes of assessing its impact. The betting is that they would have allowed it to go through but would have required significant divestments. But getting a decent price for these assets from rivals would have proved near impossible for an industry paralysed by a dearth of financing.
Although Mr Kloppers has not pulled off the deal BHP may still be in a good position to benefit from the troubles facing the mining industry. If commodity prices stay low and banks start lending again then smaller mining companies will represent great bargains for firms with a healthy balance sheet such as BHP. Rio, loaded with debt, looks in less good shape. Miners with heavy borrowings, such as Xstrata, have been punished by investors. Rio’s shares plunged by as much as 42% after BHP announced that it would not continue with its bid. A year of potential megadeals has yielded nothing: consolidation in the mining industry might be on hold for some time.
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