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BHP Billiton ditches $66bn Rio bid
Allan Seccombe & David McKay
Posted: Tue, 25 Nov 2008
[miningmx.com] -- BHP BILLITON surprised many in the market by walking away from its $66bn offer for debt-laden Rio Tinto because of deteriorating global economic conditions and questions about how long it will take for markets to right themselves.
"We have 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,” BHP CEO Marius Kloppers said.
“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 said, adding BHP Billiton is very focused on the strength of its balance sheet.
At $42bn, Rio Tinto has seven times the amount of debt that BHP Billiton does. It has also been struggling to find buyers for
assets it wanted to sell to fund its purchase of Alcan, the aluminium business.
“I’m completely relaxed that we’ve taken a great decision for shareholders,” Kloppers said.
The level of debt in the merged entity would be risky for shareholders when looking at cash flows generated in these difficult economic conditions, he said.
BHP Billiton pointed out there could be difficulties in
selling assets already earmarked for sale by Rio Tinto, including Rio Tinto Alcan Packaging and Alcan Engineered Products, "which impacts the ability to reduce debt and requires the continued management of these complex businesses."
BHP chairman Don Argus said the market should take comfort from the “courage” shown by Kloppers and his management team in firstly looking at a transaction as large and as complex as the takeover of Rio and then having the courage to walk away from it when the economic environment changed.
“The way this has been handled was very professional and disciplined. There is a positive side to this rather than negative,” Argus said.
Somewhere, somebody expected this deal to happen,” said Sasha Naryshkine, an analyst at Johannesburg-based stockbrokerage, Vestact, in the wake of the 40% decline in the share price of Rio Tinto.
“In short, you’d have to say reaction to the deal being called off has been relief for BHP Billiton
shareholders and bitter disappointment for Rio Tinto shareholders.”
BHP Billiton's shares were up 4.6% in London.
“I’m not surprised,” said Peter Major, an asset manager at Cadiz. “There are probably better deals out there for Marius while in the meantime, BHP Billiton is highly cash generative. As for Tom Albanese, he should have sold out a year ago.”
BHP Billiton has spent around $500m on the bid so far and some analysts said this could easily have doubled, with the European Commission, which will make a decison in January, possibly blocking the transaction.
Tim Barker, a resources analysts at BT Financial Group in Sydney, was quoted by Reuters as saying, "There's certainly had been no indication that BHP would do this -- it's a surprise."
The deteriorating markets countered any remedies BHP Billiton would have offered to the European Commission, which is understood to want a disposal of iron ore and metallurgical coal from the
merged entity, Kloppers said.
“Given the current economic circumstances and uncertainty regarding our ability to achieve fair divestment values in the required time frames, these remedies would contribute to the cost and risk of the transaction,’ he said.
One of the upsides for the overall market though, analysts said, is that concerns about a single dominant player in the iron ore sector, which could more or less dictate prices, has diminished.
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