BHP Billiton abruptly broke off its 18-month pursuit of rival mining company Rio Tinto,
saying the recent fall in commodity prices and worsening world economy made the $68 billion
deal too risky to complete.
Although BHP said it could still pursue other mining companies weakened by the downturn, the
collapse of the all-stock combination — once valued at more than $170 billion — could be
the last nail in the coffin of the great merger-and-acquisition boom that stretched from
2004 to 2007.
Shares of Rio Tinto fell 37% in London on the news, while those of BHP rose 7%, indicating
relief among investors concerned about BHP’s potential debt load from a takeover.
The proposed deal would have linked the world’s largest and third-largest mining companies,
measured by production, and created an international commodity juggernaut, with operations
from Australia to Alaska and interests in copper, aluminum, iron ore and other vital raw
materials.
The merger would have left 70% or more of the world’s seaborne iron ore, a key steelmaking
ingredient, in the hands of two companies — BHP-Rio and Brazilian mining concern Companhia
Vale do Rio Doce — giving them extraordinary leverage over buyers. Steelmakers protested
the merger from the outset.
BHP, based in Melbourne, Australia, said it abandoned its offer for London-based Rio because
it feared its own debt would rise too high if the combination were completed, especially
since the economic downturn would make it difficult to sell assets to relieve debt.
“This decision is set against the global economic crisis and its impact on our assessment of
its benefits,” said BHP Chief Executive Marius Kloppers. “I think the commodity prices
across our suite of assets and for most of the other players have gone down by 50% over the
last six weeks. It has clearly impacted our cash flows.”
The deal’s demise doesn’t reflect well on the chief executives of either company, though
neither could have foreseen the rapid decline in the commodities markets. Each has been in
his post for a relatively short time and has been consumed with the proposed takeover. Both
men have long histories in the mining industry, but far different approaches.
Mr. Kloppers, a South African-born vegetarian, is quiet in demeanor but considered more
aggressive in business practices. Rio Tinto CEO Tom Albanese, who learned the industry while
staking claims in a tent in remote Alaska, is more conservative. Those traits are reflected
in their response to the current downturn as well, with Rio Tinto making production cuts and
BHP holding off.
The bold takeover bid was launched just weeks after BHP’s Mr. Kloppers, a chemical engineer
by training with a Ph.D. from Massachusetts Institute of Technology, took the helm.
Throughout the last year, Mr. Kloppers described the proposed merger as a deal for all
seasons. He promoted the takeover with investors, many of whom held both BHP and Rio Tinto
shares, by telling them it was in their best interests since both companies had mines in
close proximity to each other and so could enjoy cost-savings.
New Jersey-born Mr. Albanese, who became CEO in May 2007, had resisted a deal, saying BHP’s
offer undervalued the company. Given the steep drop in commodity prices since the offer was
made, it now appears to have been generous.
Rio Tinto said it would “continue with its strategy of operating and developing large-scale,
long-life, low-cost assets to generate significant value for shareholders. Rio Tinto has an
exceptional portfolio of cash-generative assets and significant stand-alone growth
opportunities.”
Other proposed mining deals have run off the rails as well this year. In March, Vale dropped
its efforts to buy Xstrata PLC for as much as $90 billion due to turmoil in the credit
markets. Then, in October, Xstrata backed off of a $10 billion offer for platinum producer
Lonmin PLC.
Still, some analysts believe other combinations could emerge as pain in the global mining
industry spreads and smaller companies become more vulnerable to takeovers.
BHP and Rio “have been printing money in recent years,” said David Thurtell, an analyst at
Citigroup in London. “I think there are lots of companies now that BHP and Rio — and BHP in
particular — are going to be wanting to take out in Australia and elsewhere.”
The collapse of what was the second-largest hostile offer on record leaves a long list of
winners and losers throughout the mining and metals sector. Among winners are the world’s
steelmakers, which insisted that a takeover of Rio Tinto by BHP would hinder healthy
competition for steelmaking materials.
Casualties include Alcoa Inc. and to a lesser degree, Chinalco, the state-owned Chinese
aluminum producer. The two companies teamed up to buy a $14.5 billion stake in Rio Tinto.
While Chinalco has lost some $10 billion on paper on the stake, the value to China of
keeping two of its steelmakers’ largest
suppliers of iron ore apart is worth much more than that, said a banker working on the deal.
For Alcoa, the roughly $1 billion it invested in Rio is now worth roughly $250 million, a
paper loss equal to about 10% of its market capitalization. Moreover, the scuttled deal
dashes hopes that Alcoa would be well positioned to buy its former rival Alcan, which is
part of Rio Tinto and which BHP was expected to sell after the merger. “We continue to
monitor the situation,” said an Alcoa spokesman.
The economic climate is starkly different from when BHP officially made its initial offer
last November of three shares for each share of Rio Tinto. At the time, prices for iron ore,
copper, coal and other metals and minerals were rising rapidly due in large part to China’s
industrialization.
When Rio Tinto resisted, BHP raised its offer to 3.4 shares. Bankers said this move likely
contributed to the deal’s collapse since, to avoid dilution, BHP had planned to buy back $30
billion of its shares. That, coupled with the assumption of $40 billion of Rio debt, as well
as its own existing borrowings, would have pushed BHP’s debt load to nearly $80 billion –
just as falling commodity prices and demand eroded its ability to pay down debt.
Indeed, by mid-2008, a slowdown was evident in China and by September, demand for mining
metals and minerals slumped sharply.
Still as recently as two weeks ago, BHP continued to argue for a deal, saying it made even
more sense in a weak economy because it would provide critical cost-saving synergies.
That view apparently started to change as BHP entered its final and most difficult stage of
the merger: seeking approval by the European Commission. BHP faced a deadline of this coming
Monday to propose asset divestitures to allay antitrust concerns outlined by the European
Union earlier this month.
But with the credit crunch and the decline in commodity prices, such asset sales would not
fetch as much as BHP anticipated a few months ago. Moreover, BHP would have had to try to
sell some of Rio’s assets — mainly its aluminum packaging and product-engineering
businesses — at a time when almost half of global aluminum production is sold unprofitably.
If it failed to do so, BHP would have had to retain those divisions, and their 20,000
employees, until the market recovered.
BHP said in a statement Tuesday that it will write off about $450 million in costs related
to the deal in the past 18 months, much of it connected to maintaining a credit facility it
had in place to refinance Rio debt.
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