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Europe Says No – BHP Abandons Rio Bid

  • December 7th, 2008
  • Posted by Amelia Birnie

BHP Billiton shocked investors last week by abandoning its ambitious A$150-billion takeover of mining rival Rio Tinto.

BHP’s surrender followed pressure on it from the European Commission to sell-off significant iron ore and coal assets, as a pre-condition for getting regulatory approvals.

This dramatically changed environment for the mining industry comes after a huge plunge in commodity prices, with the global financial crisis.

As the financial crisis metamorphoses into a global recession, BHP’s share price has fluctuated, mostly lower.

In addition, growth in China’s powerhouse economy has halved and steel production is slowing.

Linked with deteriorating economic conditions in China, that country made what appears to have be a spoiling move last February  — grabbing a 9% cent stake in Rio.

It aused BHP to quickly raise its offer and lower its acceptance conditions — to which European regulators immediately raised their objections.

Had BHP’s takeover been successful, the group would have commanded enormous market power, controlling 40% of global coking coal, 36% of iron ore and 15% of thermal coal.

HAUNTED BY THE PAST

The ghost of Magma Copper loomed over BHP’s directors as their two and a half day board meeting got underway last Monday.

Although only one director had been there in 1997 for BHP’s disastrous acquisition of the US copper group, all of the other directors were equally nervous.

The A$150-billion planned takeover of Rio Tinto could have returned BHP to the days of massive write-offs and slashed dividends.

“Nobody wanted 1997 again,” one BHP board insider told The Australian Financial Review.

Every takeover has its bloody twists and turns, but BHP Chief Executive Marius Kloppers, had already reached the conclusion that the numbers no longer stacked up.

IN THE LONG RUN

BHP Billiton has spent more than A$700-million over the past 18 months on progressing its bid for Rio, but remains confident commodity prices will recover.

Mr Kloppers says the company cannot risk taking on Rio’s debt in the current climate, though he believes commodity prices will recover.

“We firmly believe in the long-term demand for our product,” he said.

BHP says it has about $US6.3 billion ($9.6-billion) of debt.

Mr Kloppers has refused to speculate on whether BHP would launch a second bid for Rio in the future, but says the current turmoil is bound to throw up other opportunities.

“There will no doubt be some players in this industry that won’t come out of this unscathed and we would have to continue to look at those opportunities,” he said.

Reference:

The Sydney Morning Herald, Sydney, “BHP scraps $150bn Rio bid”, 26.11.08
The Australian Financial Review, Sydney, “Why BHP abandoned Rio bid”, 27.11.08
The Australian Financial Review Magazine, Sydney, “Marius Kloppers…”, December 2008

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