BHP Billiton scraps approach for Rio Tinto

Deal said to be no longer in shareholders’ interests after economic downturn

By Simon Kennedy, MarketWatch
Last update: 9:27 a.m. EST Nov. 25, 2008

LONDON (MarketWatch) — BHP Billiton on Tuesday scrapped its roughly $66 billion hostile bid for mining rival Rio Tinto, saying the deal is no longer in the best interests of shareholders after the global economic downturn led to a slump in commodity prices.
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BHP 38.50, +5.08, +15.2%) (AU:BHP: news, chart, profile) Chairman Don Argus said the miner hasn’t changed its opinion on the “industrial logic” of a deal with Rio Tinto (UK:RIO: news, chart, profile) (RTP:

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RTP 103.00, -42.99, -29.4%) (AU:RIO: news, chart, profile) or the long-term prospects for natural-resource demand.

But he said the firm has “concerns about the continued deterioration of near-term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve, and the risks that these issues imply for shareholder value.”
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Shares in Rio Tinto tumbled around 34% in afternoon London trading, while BHP Billiton’s shares gained 16%, having jumped as much as 21% shortly after the market opened.
BHP raised the all-stock bid for its rival back in February, offering 3.4 of its own shares for every Rio Tinto share.
The deal was worth close to $150 billion when it was announced, but the value had dwindled to around $66 billion at Monday’s close as the global downturn weighed on BHP’s shares.
Steel makers had been strongly opposed to the takeover, fearing it would send iron ore prices rocketing as the combined group became the dominant player in the global supply of iron ore.
“Steel makers around the world will be rejoicing today,” said Ian Rogers, director of industry trade group U.K. Steel.
Rogers said a merger would have created a “virtual duopoly” between BHP-Rio and Brazil’s Vale (RIO:

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RIO 11.74, +0.51, +4.5%) in the iron ore market.

Disposals required
The deal had been cleared by regulators in Australia and the U.S., but still faced opposition from European authorities, who are expected to demand the sale of some iron ore and coal assets.
BHP said Tuesday that it won’t offer any remedies to the European Commission, which should result in the deal being blocked. If European regulators still decided to let the deal proceed, BHP would advise shareholders to vote against it, the company added.
Charles Stanley analyst Tom Gidley-Kitchin said BHP may have decided not to simply withdraw its merger notification to the European Commission in order to get the European authority’s decision and reasoning behind it on record.
BHP’s chief executive, Marius Kloppers, said the company had “previously said that similar cultures and the overlap of key assets and infrastructure make this a compelling combination. Recent global events and associated falls in commodity prices have, however, altered risk dimensions.”
Chart of CRB
“The greater debt exposure of the combination plus the difficulty of divesting assets have increased the risks to shareholder value to an unacceptable level,” he added.
The group noted, for example, that copper prices have fallen by almost a quarter in the last month, adding to a decline of over 40% in the 12 months before that. BHP said it also had concerns about the ability to sell non-core assets already flagged for disposal by Rio Tinto, which would have made it harder to reduce debt levels.
Paul Singer, an equity analyst at Barclays Wealth, said the decision “shows good strategic discipline by the group.”
Singer said that as well as the likely problems with selling assets, Rio is currently hampered by relatively high debt levels compared to BHP.

BHP carries $6.3 billion in debt, compared to around $40 billion for Rio Tinto.
In a brief statement of its own, Rio Tinto said it believes it has significant stand-alone growth opportunities and will continue its strategy of “developing large scale, long life, low cost assets.”
Write-downs on the way
BHP said it intends to write off around $450 million of costs linked to the bid in its half-year results in December. Much of that charge relates to the fees associated with setting up a $55 billion financing package with banks.
Separately, BHP said it would take a pretax impairment charge of around $2.1 billion on its Ravensthorpe and Yabulu nickel operations due to the sharp fall in demand for the metal.
Evolution Securities analyst Charles Cooper said he withdrawal of the offer removes some of the risk attached to BHP, but he still remains concerned that the announced write-downs only related to its nickel assets and bid costs.
“Given the general collapse in commodity prices we would expect there to be significant negative mark-to-market revenue pricing adjustments at the company’s copper mines,” Cooper said in a note to clients.
“We believe, therefore, that there remains considerable downside risk to our earnings expectations for BHP Billiton as these are currently presaged on an oil price of $100 a barrel,” he added.
Rio Tinto had always opposed the takeover, claiming it significantly undervalues the firm.
Charles Stanley’s Gidley-Kitchin said the miner needs to refinance around $9 billion of debt next October.
“If the world avoids a 1929-style meltdown, that should be feasible, even if the terms will be less attractive,” he said.
“But Rio’s management will have to make a strong case to investors in the near future as to how it will proceed under the scenario which it always said it wanted.” End of Story

Simon Kennedy is the City correspondent for MarketWatch in London.

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