Australian Regulators Clear BHP Bid for Rio Tinto

Australia's competition watchdog cleared miner BHP Billiton's proposed $114 billion bid for rival Rio Tinto on Wednesday, saying it was unlikely to substantially lessen competition.

The decision sparked an over 14 percent jump in Rio Tinto's shares trading in Australia, narrowing the discount in Rio's share price to the value of BHP's offer to 14 percent from 19 percent, as investors grew more confident a deal would eventually go ahead. But Rio shares only gained 0.5 percent in European trading. BHP shares fell by 4 percent in European trading.

The key hurdle for the takeover is approval from the European Commission, which has flagged it is worried about the impact of surging commodity prices on manufacturers and consumers. 

"The ACCC's approval could bode well the European Commission's ruling," said DJ Carmichael analyst James Wilson.

The Australian Competition and Consumer Commission's main concern had been about the impact of merging of the world's No.2 and No.3 iron ore producers, but it said it was persuaded the combined group would not use its power to corner the market.

"While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market," ACCC Chairman Graeme Samuel said in a statement.

It recognized the role steel makers were playing in encouraging new producers, like Fortescue Metals Group and Midwest Corp, which was recently taken over by Chinese state-owned trading firm Sinosteel.

"The ACCC's inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well as sponsorship of alternative suppliers by steel makers," Samuel said.

Analysts said the decision by the Australian commission could make it tougher for the EC to block the deal or impose deal-breaking conditions, such as forcing BHP to sell off some iron ore assets, however they said it was not a done deal yet.

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"It's going to be very difficult for a competition commission in Europe to go against the findings of the ACCC here, given arguably the ACCC's probably closer to the action and more capable of understanding the ramifications," said Tim Schroeders, a portfolio manager at Pengana Capital.

"There's no guarantees, of course, because the flip side of that may be that European steel mills have a lot more say and lobbying power in convincing the European Commission otherwise."

The EC on Monday set a deadline of Jan. 15 for its in-depth review.

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