Monday, December 01, 2008
How a $130bn mining mega-merger vanished down a credit black hole
| Monday, 01 December 2008 | |
| If BHP Billiton versus Rio Tinto had been a boxing match, it would have got top billing. BHP's Marius Kloppers and Rio's Tom Albanese are heavyweight titans of mining. Kloppers wanted to buy Rio, but Albanese would not let him, and so began what would have been the world's second-largest hostile takeover. The ultimate prize: dominance of the mining industry and control of much of the minerals which the world consumes. But last week, Kloppers - to everyone's surprise - threw in the towel. He announced that the $130bn bid he launched a year ago, just five weeks after becoming chief executive of BHP, was off. After a two-day board meeting in Melbourne, BHP said that a combination of the credit crunch, regulatory objections and the slump in commodity prices had conspired to kill off the deal. No one could quite believe it. Only a few weeks ago, Kloppers had dismissed suggestions that the global economic downturn made the deal unworkable, declaring it a deal 'for all seasons'. He had also stressed - again - that the $55bn debt financing arranged by BHP with its banks for the deal remained in place, despite the credit crunch. Albanese will certainly sleep more easily this weekend. Only three weeks ago, it was plain to see that fending off BHP's advances was taking its toll. On a trip to a new project in Madagascar, The Observer asked him if he was finding it a strain: 'What do you think?' he replied with a forced smile. For 12 months, both companies have employed legions of expensive advisers to talk down the other side to the media and the City in a massive public relations offensive. At times, the two companies - who are joint venture partners in some projects - have struggled to keep relations civil. Talking to The Observer, Albanese insisted he did not let his personal feelings about being taken over by an arch-rival influence him. 'There is a sufficiently healthy level of professional respect between the two organisations,' he said. 'What I say is we're like two banks on opposite sides of the street.' But he could not resist a dig at BHP, saying he was disappointed about its management of the huge Escondida copper mine in Chile, in which Rio holds a minority stake. BHP insisted last week that it had not bottled out of the takeover. Certainly, it appeared that the statement of objections issued this month by the European Commission to the deal was the final knock-out blow. The EC told BHP it would have to sell significant amounts of the combined entity's iron ore mines in order to gain its approval. Given that the two companies would have controlled more than a third of the world's seaborne iron ore supplies, this should not have come as a surprise to BHP's army of lawyers. But they could not have anticipated that the credit crunch and dramatic reversal of the commodities boom would make it so hard to find buyers for these assets. Charles Kernot, mining analyst at Evolution Securities, said the credit crunch and global slowdown were the main reasons that BHP pulled out. Despite Kloppers' recent protestations to the contrary, refinancing Rio's $40bn debt and raising the other $15bn would have been much harder - and more expensive - given the scarcity of credit. In October, commodity prices also fell by more than a fifth on average, the steepest fall ever. The global downturn sapped demand, particularly in China, whose economic growth had largely been responsible for driving prices up so high in the first place. Commodity prices have continued to fall this month, with copper, for example, down 10 per cent. In response, BHP last week started to cut expansion plans at some of its mines to cut production and conserve cash. Retrenchment, not global domination by acquiring Rio, is now the order of the day. Kernot said: 'You could say that the EC's statement of objections provided the get-out-of-jail free card Marius Kloppers was looking for.' But, unlike a title fight, it's not clear who the outright winner is. Both sides are smarting from the bruising encounter. At Rio's Barbican headquarters in London, relief was tempered by the 40 per cent collapse in the company's share price following BHP's announcement. This partly reflects worries over the $40bn of debt Rio must refinance after it bought aluminium producer Alcan last year, at the peak of the commodities boom. The first repayment is due next October, when it must find $9bn. Rio has already delayed the sales of $10bn of assets to help pay down its debt because it can't find suitable buyers. This month, Albanese affected nonchalance on this deadline, insisting it could be repaid from the company's profits, adding: 'October 2009 is quite a way away.' Certainly, Rio generates vast amounts of cash and is forecast to make $20bn of profits next year. But profit forecasts are a dangerous game in the current environment, particularly for commodity producers. So Rio, like BHP, is having to retrench, hoarding cash to pay off its debts. Kloppers, and particularly BHP's chairman Don Argus, who sanctioned the takeover plan, have also been weakened by the saga. Shareholders are furious about the $450m in lawyers', bankers' and PR advisers' fees it racked up. Kloppers is unlikely to try another mega-acquisition for some time. Some shareholders also called for Argus to step down following the company's annual meeting last Thursday. But if anyone has been left on the ropes by this aborted deal, it is Chinalco. The Chinese aluminium producer bought a 9 per cent stake in Rio in February to try to scupper the deal and prevent a Rio-BHP stranglehold on iron ore supplies to China. Now the company is nursing a 75 per cent paper loss on its $14bn stake. As adapted from The Guardian |
