BHP Billiton drops Rio Tinto takeover bid

26 Nov 2008, 7:36 am   -   Source: AFP
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The world's biggest miner BHP Billiton has dropped its controversial hostile takeover bid for rival Rio Tinto because of the global economic crisis.

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The world's biggest miner BHP Billiton has dropped its controversial hostile takeover bid for rival Rio Tinto because of the global economic crisis.

The massive offer had raised concerns from steelmakers that the new company would have too much control over commodity prices and was repeatedly rejected by Rio Tinto as too law.

Shares in Rio plummeted almost 37.8 percent to 1,500 pence (23 dollars) during morning trade in London Tuesday, while BHP's stock added 16.5 percent to 1,142 pence.

BHP chief executive Marius Kloppers said the offer was now off the table.
"The greater debt exposure of the combination plus the difficulty of divesting assets have increased the risks to shareholder value to an unacceptable level," he said in a statement.

Chairman Don Argus said the Anglo-Australian company was concerned about the "deterioration of near-term economic conditions" but insisted the tie-up still made sense.

"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," he said in a statement.

BHP Billiton increased its to offer to 3.4 of its own shares for every Rio Tinto share in February, effectively valuing Rio, the world's third-biggest miner, at 147.4 billion dollars at the time the offer was made.

It had initially offered three for one.

The withdrawal came as the bid, which had passed Australian and US competition regulators, was awaiting a ruling from the European Union antitrust regulator.

Rio Tinto had said the bid vastly undervalued the Anglo-Australian group, whose major products include aluminium, copper, diamonds, gold and iron ore.

Rio Tinto said it would push on with creating "significant value" for shareholders after BHP walked away.

"Rio Tinto will continue with its strategy of operating and developing large scale, long life, low cost assets to generate significant value for shareholders," it said a short statement.

"Rio Tinto has an exceptional portfolio of cash-generative assets and significant stand alone growth opportunities," it added.

The world economic crisis has hit the mining industry full on.

A slowdown in demand from China has forced a cutback in iron ore production.

Rio Tinto this month slashed output at its western Australian plants by 10 percent to bring production in line with revised customer requirements.

At the weekend BHP said it would reduce iron ore pellet production at the Samarco iron ore interest in Brazil, in which it owns a 50 percent stake, due to weak demand.

The world's largest producer of iron ore, Brazil's Vale, has slashed output by up to 10 percent to adjust to shrinking demand.

Analysts had predicted that negotiations on contract prices for iron ore would see an end to the stratospheric price rises of the past six years amid booming growth in China and other developing nations.

BHP Billiton, which will book a 450 million dollar (289 million US) cost of the takeover bid, said it had however approved a 4.8 billion US dollar investment to expand iron ore operations in Western Australia by 50 million tonnes to 205 million tonnes a year.

"While there is substantial uncertainty in the short term outlook, this investment decision highlights BHP Billiton's confidence that the long term outlook remains positive," the company's chief executive of ferrous and coal
Marcus Randolph said in a statement.

Analysts welcomed BHP's decision to end the Rio Tinto campaign as sensible given the financial turmoil.

"I think it is a wise strategy," Fat Prophets analyst Gavin Wendt told national news agency AAP.

"It was always going to be a high risk bid with lots of potential stumbling blocks and the biggest one, aside from having to get European Commission approval, is that we're currently in one of the most uncertain financial times that has been witnessed in 80 years or more."

DJ Carmichael analyst James Wilson said the likelihood that BHP Billiton may have had to sell assets to satisfy the European regulators, combined with debt concerns and the economic uncertainty, had killed the proposal.

"I think it is great for BHP, I think it shows a sign of maturity that they're willing to cut their losses and get out of there before it costs too much," Wilson said.

 

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