BHP Junks Rio Bid, Hunkers Down

Sydney, Nov 26, 2008 (ABN Newswire) - 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 but have yet to be sold.

The charge against Raventhorpe nickel laterite plant and Yabulu expansion project, reminded some investors of the late 1990s when BHP was forced to write down the values of Magma Copper, Zimbabwe platinum operations and its Hot-Briquetted Iron plant in Western Australia. It is a very different company now, compared to then.

Here's the BHP Billiton statement:

The BHP Billiton Board today decided that it no longer believes that completion of the offers for Rio Tinto would be in the best interests of BHP Billiton shareholders.

BHP Billiton Chairman, Don Argus, said today's decision was first and foremost about BHP Billiton shareholder value and risks to that shareholder value.

"We have said that we would only seek to complete the transaction if it was in the best interests of BHP Billiton's shareholders.

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 any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value."

Marius Kloppers, BHP Billiton's CEO, said:

"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 Billiton is very focused on balance sheet strength. Accordingly, the greater debt exposure of the combination plus the difficulty of divesting assets have increased the risks to shareholder value to an unacceptable level."

Commodity price falls in the last month are illustrated by reference to the LME copper cash price. Over the 12 month period to 21 October 2008 the fall was approximately 43%. In the one month to 21 November 2008 the fall was 23%.

These falls are paralleled by market movements. For example, for the 12 month period the ASX S&P/ASX 200 index fell by 36% and, for the one month period it fell by 21%.

Regarding antitrust requirements, BHP Billiton has received clearance without remedies from the US Department of Justice and the Australian Competition and Consumer Commission.

BHP Billiton understands that the European Commission will require divestments in iron ore and metallurgical coal to deal with its concerns.

In the normal range of economic conditions BHP Billiton would have been prepared to offer remedies which we believe would have been both acceptable and manageable.

However, 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.

Against this background BHP Billiton will not offer any remedies to the European Commission antitrust authorities, and BHP Billiton expects that without remedies European Commission clearance will be withheld.

The European Commission's formal review process will likely continue until early to mid January 2009.

Other key elements that have substantially increased the risks to shareholder value for the combined company to unacceptable levels include:


The prospective level of debt of the combined company, compared to the possible cashflows required to service and repay that debt against the background of difficult economic conditions over the near term; and

Concerns regarding the ability to divest other non-core assets already flagged for divestment by Rio Tinto including Rio Tinto Alcan Packaging and Rio Tinto Alcan Engineered Products which impacts the ability to reduce debt and requires the continued management of these complex businesses.


If, despite BHP Billiton offering no remedies, European Commission clearance were to occur, BHP Billiton would be required to seek the approval of its shareholders in  Extraordinary General Meetings.

Were this to happen, BHP Billiton's directors intend to recommend that its shareholders vote against approving the transaction.

BHP Billiton intends to write off the costs of approximately $450 million incurred in progressing this matter over the eighteen months up to today's announcement in the December 2008 half year results.

Despite the near term challenges, BHP Billiton is in a very strong position with net debt of only US$6.3bn at 31 October, 2008 and a portfolio of assets that will continue to deliver sound cash-flows.

Marius Kloppers said:

"BHP Billiton will continue to invest to be in a position to meet long term customer demand.

Our announcement today that the Board has approved RGP5, the next major growth project for our iron ore business, demonstrates this.

Our strong balance sheet is a competitive advantage in times like these. Together with our portfolio of long-life, low cost, expandable, Tier 1 assets, we believe this places us in a better position than any other major mining company to deal with these uncertain times.

BHP Billiton's priorities for cash flows remain to invest in its core businesses, manage its balance sheet to a solid single A credit rating, maintain its progressive dividend policy and return any surplus cash to shareholders."


 

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