BHP Billiton finally drops bid for Rio Tinto

25 November 2008: Mining giant BHP Billiton has been forced to ditch its hostile takeover bid for rival Rio Tinto as a result of the plunge in commodity prices and the worsening world economy.

BHP had offered £75bn in shares for Rio in a deal that would have created a mining behemoth with annual sales of £170bn – at the height of the commodity price boom.

The deal was first mooted in November 2007 by BHP CEO, former McKinsey consultant Marius Kloppers, after he had been in the job for just one month. However, Kloppers’ approach was rejected and BHP went hostile in February 2008. That was before the full scale of the global financial meltdown became apparent.

It also provoked the interest of regulators across the world, and the scepticism of authorities in China and elsewhere who feared that it would give one company excessive control of supplies of particular metals and minerals, especially iron ore and coal which together are the main components in steel production.

If BHP had been successful, it would have gained control of 14% of global coal production, one-third of global iron ore production and a 40% share of China’s iron ore imports. It would also have enjoyed a dominant position in aluminium and copper. In response, Chinalco, the aluminium company majority owned by the Chinese state, spent $14 billion buying a 9% stake in Rio Tinto in a bid to block the deal.

And, while US and Australian competition authorities approved the deal, the European Union was expected to demand a number of sell-offs in iron and coal – sales that would have to be made in a fast declining market. Indeed, The Times newspaper reports that it was the European Commission’s insistence that BHP must divest key iron and coal assets that sank the deal.

When commodity prices started to slide in the summer – a slide that accelerated in the autumn as the financial turmoil worsened – so did both BHP’s and Rio Tinto’s share prices, reducing the £75bn offer in value to £43bn.

But given the commodity price fall, the difficulty of making any necessary disposals in a falling market and the level of debt of the combined company, Kloppers was forced to abandon the bid that he had just weeks earlier described as ‘a deal for all seasons’.

“Recent global events and associated falls in commodity prices have altered the risk dimensions,” said Kloppers. In particular, iron ore prices have fallen from an average of $200 per tone in March to just $60 per tonne in November.

Although the deal is now off, Chinalco will also be nursing a hefty loss as Rio Tinto’s share price fell by one-third after the deal was called off – and that following big falls in the summer and autumn due to the commodity price plunge. Rio Tinto management will now need to turn their attention to the $24bn mountain of debt, of which $8.9bn relates to the finance of its Alcan acquisition, which will need to be refinanced by October 2009.

The biggest winner from the collapse of the bid is banking giant Citigroup, which had been committed to finding $55bn it could ill afford in funding for the deal. Instead, it has pocketed fees estimated at $75m. BHP spent a total of £291m ($430m) on legal fees and Rio Tinto £120m ($180m).

The deal had been complicated by the fact that both companies have dual listings in both London and Australia, with the British arm of Rio Tinto also boasting American Depositary Receipts, listed on the New York Stock Exchange.