Bloomberg
BHP Billiton Ltd. and Rio Tinto Group abandoned a plan to create the world’s largest iron-ore exporter after opposition from regulators in Europe and Asia.
“It has become increasingly apparent that regulatory approvals of the joint venture are unlikely to be achieved,” Melbourne-based BHP said today in a statement. Rio confirmed the plan to combine the two companies’ Australian operations was dropped in a separate statement.
BHP and Rio, the world’s largest and third-largest mining companies, would have saved at least $10 billion in costs by combining their mines, railroads and ports in the remote Pilbara region. Gains in iron ore prices in the 16 months since the deal was proposed mean London-based Rio may benefit more than BHP from its collapse because it produces more of the steelmaking raw material, according to Pengana Capital Ltd.
“Rio has got more to gain from ending this deal because they have more infrastructure alternatives,” said Tim Schroeders who helps manage about $1 billion at Pengana in Melbourne, including BHP and Rio shares. The infrastructure “flexibility that Rio has was something that BHP wanted to leverage into in terms of fast tracking expansions. Rio now holds the winning hand.”
Rio’s London traded shares gained 0.2 percent on Oct. 15 and BHP’s declined 0.7 percent before the Australian stock market opened today.
Antitrust authorities in Germany and Japan last week said they opposed the deal. The European Commission was also likely to raise formal objections, two people familiar with the plan said last week. The companies were informed of the results of the commission’s preliminary investigation on Oct. 15.
‘Substantial’ Remedies
“The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing,” Rio’s Chief Executive Officer Tom Albanese, 53, said today. Some regulators wanted “substantial” remedies that were unacceptable, Rio said.
BHP had agreed to pay Rio $5.8 billion to form the venture. Neither company will pay the $276 million break fee, they said.
The two companies agreed on the deal on June 5, 2009, when Rio, battling high levels of debt, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and the joint venture. The deals allowed Rio to slash debt without selling bonds and stakes in its largest mines, defusing a backlash from shareholders and politicians.
Plan B
“The imperative at the time of the deal given Rio’s balance sheet problems is not really an issue at this point in time given the strong commodity price environment,” Schroeders said.
The two companies have already agreed on a so-called Plan B, involving sharing infrastructure and blending ore, Sanford C. Bernstein Ltd. analyst Paul Galloway wrote in an Oct. 15 report. BHP probably has more to gain from such an arrangement, according to the report.
BHP’s Chief Executive Marius Kloppers, 48, abandoned a $66 billion hostile bid for Rio in 2008, citing Rio’s high level of debt and economic uncertainty. A Pilbara joint venture had been studied in 1999 and was a key driver behind BHP’s hostile takeover bid for Rio, Citigroup Inc. said in a May 2009 report.
“The large synergies from combining our West Australian iron ore assets with Rio Tinto’s have caused us to persevere in seeking to obtain regulatory approvals,” Kloppers said today.
“It has become increasingly apparent that regulatory approvals of the joint venture are unlikely to be achieved,” Melbourne-based BHP said today in a statement. Rio confirmed the plan to combine the two companies’ Australian operations was dropped in a separate statement.
BHP and Rio, the world’s largest and third-largest mining companies, would have saved at least $10 billion in costs by combining their mines, railroads and ports in the remote Pilbara region. Gains in iron ore prices in the 16 months since the deal was proposed mean London-based Rio may benefit more than BHP from its collapse because it produces more of the steelmaking raw material, according to Pengana Capital Ltd.
“Rio has got more to gain from ending this deal because they have more infrastructure alternatives,” said Tim Schroeders who helps manage about $1 billion at Pengana in Melbourne, including BHP and Rio shares. The infrastructure “flexibility that Rio has was something that BHP wanted to leverage into in terms of fast tracking expansions. Rio now holds the winning hand.”
Rio’s London traded shares gained 0.2 percent on Oct. 15 and BHP’s declined 0.7 percent before the Australian stock market opened today.
Antitrust authorities in Germany and Japan last week said they opposed the deal. The European Commission was also likely to raise formal objections, two people familiar with the plan said last week. The companies were informed of the results of the commission’s preliminary investigation on Oct. 15.
‘Substantial’ Remedies
“The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing,” Rio’s Chief Executive Officer Tom Albanese, 53, said today. Some regulators wanted “substantial” remedies that were unacceptable, Rio said.
BHP had agreed to pay Rio $5.8 billion to form the venture. Neither company will pay the $276 million break fee, they said.
The two companies agreed on the deal on June 5, 2009, when Rio, battling high levels of debt, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and the joint venture. The deals allowed Rio to slash debt without selling bonds and stakes in its largest mines, defusing a backlash from shareholders and politicians.
Plan B
“The imperative at the time of the deal given Rio’s balance sheet problems is not really an issue at this point in time given the strong commodity price environment,” Schroeders said.
The two companies have already agreed on a so-called Plan B, involving sharing infrastructure and blending ore, Sanford C. Bernstein Ltd. analyst Paul Galloway wrote in an Oct. 15 report. BHP probably has more to gain from such an arrangement, according to the report.
BHP’s Chief Executive Marius Kloppers, 48, abandoned a $66 billion hostile bid for Rio in 2008, citing Rio’s high level of debt and economic uncertainty. A Pilbara joint venture had been studied in 1999 and was a key driver behind BHP’s hostile takeover bid for Rio, Citigroup Inc. said in a May 2009 report.
“The large synergies from combining our West Australian iron ore assets with Rio Tinto’s have caused us to persevere in seeking to obtain regulatory approvals,” Kloppers said today.
