Some were surprised, but they shouldn’t have by the decision by BHP Billiton to pull the Rio Tinto bid.
The credit markets had been signalling it for months.
The market in London overnight made BHP the winner from its decision, and Rio was the big loser.
It has been obviously for months that BHP’s 3.4 share offer for rival Rio was doomed as debt markets tightened, making it more problematic that the deal would happen.
BHP will now hunker down to survive the crunch, and use its under geared balance sheet to make some strategic buys; Rio joins the list of heavily indebted companies that the bears will now monster.
When BHP first announced its interest in Rio just over a year ago, the potential deal was worth $US140 billion and was the largest ever considered in the mining sector and one of the biggest in corporate history.
But the value of the planned bid had fallen to just $US62 billion as the value of both group’s shares fell under the weight of a looming global recession, slowdown in China and slumping prices for copper, oil, lead, zinc and spot prices for iron ore and coking coal..
BHP had been protesting for months that as it was an all paper offer, the level of activity in the sharemarket was not a consideration, but that was one eyed special pleading.
BHP had planned to raise $US40 billion next year to refinance Rio’s debt and make a capital return of some description; additionally it wanted to make asset sales to raise more cash, get rid of unwanted assets and to meet whatever terms the European anti-trust regulators set, assuming they said ‘yes’.
A green light from Brussels for the $US66 billion($A103 billion) deal wasn’t certain; in fact it was looking more and more like the regulators could say ‘no’.
We will find out because though BHP has pulled the bid, it remains current until next February.
The company is not allowed to officially abandon its offer, which is pre-conditional on approval from the European competition regulator, at the moment. That will come in January, at this stage.
Some far-sighted commentators are wondering if there might be a further decision down the track: chairman Don Argus is retiring soon: could CEO Marius Kloppers depart as well, a victim of the way he ran this bid?
That’s for the future: the now is working out where the BHP decision leaves it and Rio.
Rio shares fell sharply overnight, BHP shares were stronger here yesterday: a case of the now usual Melbourne-‘leak’.
In London trading Rio’s shares lost almost 30% of their value, down 723p at £17.27, BHP was one of the best performers, up 14.3% at £11.20.
Earlier, in Australian trading, BHP shares soared $2.84, or 12.1%, to $26.22 while Rio jumped $4.10, or 6.9%, to $63.90.
Certainly it will make for a more interesting annual meeting for BHP tomorrow. Now the board and management will have to face the music and provide more details on why the bid was pulled and how BHP plans to adapt to the commodity crunch now upon us.
Yesterday’s board meeting did throw some light on both subjects.
Besides the Rio decision, there was expansion in the WA iron ore businesses and a $US2.1 billion impairment charge on its Ravensthorpe and Yabulu nickel (In WA and Queensland respectively) assets as a result of a ”significant deterioration” in the nickel market. Those projects cost $US2.8 billion.
The company has also approved a $US4.billion investment to expand its Pilbara iron ore operations in Western Australia by 50 million tonnes to 205 million tonnes a year.
BHP decided that completing the Rio deal would no longer be in the best interest of its shareholders, despite having spent 18 months and an admitted $US450 million in fees on the transaction to date.(Better than spending $US3.5 billion if the bid had gone through).
BHP said the European Commission had made clear it would require divestments in iron ore and coking coal to placate its competition concerns.
"We have said that we would only seek to complete the transaction if it was in the best interest of BHP Billiton’s shareholders,” said BHP’s chairman, Don Argus.
"While we have not changed our view of the basic industrial logic of the combination or of the longer-term prospects for natural resource demand growth driven by emerging economies, we have concerns about the continued deterioration of near-term global economic conditions, the lack of certainty as to the time it will take conditions to improve and the risks that these issues imply for shareholder value.”
"Recent global events and associated falls in commodity prices have, however, altered risk dimensions," BHP Billiton chief executive Marius Kloppers said in a statement.
"The greater debt exposure of the combination plus the difficulty of divesting assets have increased the risks to shareholder value to an unacceptable level."
Vocal opposition to the merger had emerged from steelmakers in Asia and Europe amid concerns a merged entity could have enormous control over global iron ore and other resource commodity prices.
In citing its reasons for abandoning its longstanding quest to acquire Rio, BHP said the prospective level of debt for the combined company was of concern.
Rio has $US42 billion of debt as a result of its acquisition of Alcan last year, while BHP had only $US6.3 billion of debt as of October 30.
BHP said it was also concerned by its ability to be able to divest some assets held by Rio, such as the Alcan packaging and engineered products divisions which have long been up for sale
