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Rio Tinto up **** Creek Without a Paddle
BHP Billiton has been weighing up a bid for Rio for years, as the two companies have highly complementary assets, especially in iron ore, coal, copper and diamonds. Chip Goodyear, former BHP chief executive, and Don Argus, chairman, pitched a friendly deal to their Rio counterparts in April last year but were rebuffed.
Mr. Goodyear was succeeded by Mr. Kloppers in October last year and within weeks BHP launched a hostile all-share bid for Rio worth $141bn (£91bn), a deal that would have been the second-largest corporate takeover in history after Vodafone’s acquisition of Mannesmann.
But it appears that BHP’s top team underestimated the severity of the crisis. Only last month, Marius Kloppers and his team, led by Alberto Calderon, chief commercial officer, were still sounding confident. Base metals prices had been dropping since July as the US economic slowdown intensified, but the real eye opener came in mid-October, when mining executives realised that Chinese demand – their only hope for a recovery in the short-term – was also tumbling. Industrial metals prices have tumbled 55 per cent since their March peak, according to the Goldman Sachs Commodity Index.
The deal began unravelling as the credit crisis made investors sceptical, and funding obligations for such a deal would have been difficult to meet. Rio Tinto’s shares plunged some 37.5 per cent since its suitor BHP Billiton abandoned its hostile takeover, ironically on the same day the World Bank cut its 2009 Chinese growth forecast to 7.5 per cent from 9.2 per cent. BHP was quick to blame falling commodity prices, a lack of demand and lackluster capital markets as the main reason for the deal falling apart. BHP’s shares rallied 7 per cent on the news.
Though BHP cited falling demand from its number one market as the main reason for abandoning its bid, the proposed merger had already received both US and Australian regulatory approval, European regulatory approval of the proposal in its current form was not forthcoming and any green light from the EU competition commission would have required the merged entity to have made some divestment of specific units which the acquiring company would have been none too keen on. Or at the very best would not be able to secure a price consistent with its own internal valuation on today’s markets
Last week BHP and its executives were still saying they were confident of reaching a “manageable solution”. But as the deadline for submitting suggestions for asset sales loomed, BHP got cold feet. “We were getting to a point with the European Commission where conversations were about divestments,” said BHP on Tuesday.
It quickly became clear to BHP that it would struggle to sell assets at a price it would be happy with, given the gridlocked financing markets and the havoc that would play with potential buyers’ ability to bid.“What may have been manageable before was not manageable now,” said BHP, indicating that companies, such as Xstrata and Anglo American, that might normally have been obvious acquirers of iron ore mines, were no longer interested
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