BHP Drops Rio Tinto Bid Citing Worsening Markets

Global miner BHP Billiton abandoned its hostile takeover bid for rival Rio Tinto, blaming sliding metals prices and the threat of global recession for scuppering the mega-merger.

BHP announced the bid last November as mining boomed worldwide on soaring demand for iron ore, steel and other resources from China and other emerging markets. At its peak, the all-share offer valued Rio at about $193 billion.

By Tuesday, as major economies tipped into recession and after a dramatic decline in mining stock prices, the target company was worth about one third of that at around $66 billion.

BHP said the risk of taking on Rio's much heavier debts, and the low prices it could expect from asset sales forced on it by regulators, were among the factors behind the decision.

"The greater debt exposure of the combination, plus the difficulty of divesting assets, have increased the risks to shareholder value to an unacceptable level," Chief Executive Marius Kloppers said in a statement.

BHP shares jumped 7.7 percent by the end of London trading, while Rio Tinto slumped over 37 percent.

Credit default swaps on BHP's debt reflected a sharp fall in investors' perceptions of the risk of default.

Aluminum Corp of China (Chinalco), which built a stake in Rio after the takeover was announced in a move widely seen as an attempt to win leverage over the takeover, said it may now raise its Rio stake further.

Investors were caught by surprise as the bid to bring together the world's second- and third-largest iron ore producers behind Brazil's Vale fell apart.

"There's certainly been no indication BHP would do this -- it's a surprise," said Tim Barker, resources analyst at BT Financial Group in Sydney.

BHP, which had already won U.S. and Australian regulatory clearance for a deal, said it had been ready to offer concessions to Brussels to secure the European Commission's blessing, but would not have been able to sell assets at a fair price in the current climate.

BHP will write off about $450 million in bid costs, mostly tied to a $55 billion debt facility lined up to refinance Rio's debt, and also took $2.1 billion in pretax writedowns on nickel assets, but the miner stressed its balance sheet remained strong.

"We have a great future without this transaction," Kloppers told a briefing, citing the group's decision to go ahead with a $4.8 billion expansion of its Australian iron ore mines.

He also said BHP would stay on the lookout for other acquisition opportunities as weaker rivals suffered.

Rio Tinto, which had consistently rejected BHP's sweetened offer of 3.4 of its shares for each Rio share as undervaluing the company, said it had no immediate comment.

Reaction

Kloppers, who hatched the deal at the top of the commodities boom, and BHP Chairman Don Argus were forced by reporters on Tuesday to defend their own positions after pulling the bid.

Prices of major world commodities such as copper and iron ore have halved in the five months since peaking in July.

Global steelmakers had opposed the deal, fearing a mega-merger that would control more than a third of the world's seaborne trade in iron ore, the main raw component in steel, would yield too much clout over pricing.

"It's positive news for steelmakers because a merger of the two big miners would have meant a supply shortage of iron ore and higher prices.

Now that raw material prices have plunged, BHP sees no merit in a costly merger," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Michael Komesaroff, managing director at Urandaline Investments, said the market had moved against a deal, noting Rio's high level of debt.

"The market has changed dramatically in the last six months. What made sense six months ago doesn't make sense now. People talked about synergies in iron ore. Those synergies are still there, but nobody is prepared to pay for them," he said.

"Rio has $42 billion in debt and BHP only $6 billion," said James Wilson, mining analyst at DJ Carmichael & Co in Perth. "There's no way BHP wants to take on that kind of debt. This, combined with obstacles with the European Union left BHP little choice but to pull the offer."

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