Rio kills off BHP deal

Michael West

October 6, 2010

THE biggest merger in Australian history is dead, with the board of Rio Tinto preparing to walk away from a $120 billion iron ore deal to join forces with rival mining company BHP Billiton in the Pilbara desert in Western Australia.
The aborted merger deal - which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago - was expected to meet opposition from European and Chinese regulators concerned about the impact of the miners' stranglehold on global iron ore prices.
But the major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP.
Sources close to the Rio board confirmed Rio was preparing to tell BHP of its decision yesterday. Rio chairman Jan du Plessis had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.
''They can't object to that,'' Mr du Plessis said. ''That's kind of us stating our investment preference. They will no doubt have their own measurements and I think that's fine.''
Although the market had speculated about the failure of the Pilbara deal since BusinessDay first foreshadowed its collapse in August, there had been no acknowledgement from either party that the merger was in trouble.
Now Rio, having canvassed the opinion of its major investors, is looking to save face.
''I think with regard to the JV and why it didn't succeed … we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn't possible.
''In short, I think we have a positive message we should spread … I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I'm not sure that gets us anywhere,'' Mr du Plessis told his fellow directors.
BusinessDay understands other directors agreed with the positive public strategy. One, Sir Rod Eddington, responded to Mr du Plessis, saying, ''In fact the opposite Jan. I think it blows up in our face''.
Besides needing the approval of regulators, the deal required approval from both BHP and Rio shareholders. And it was this which finally prompted the Rio board to move. Rio - whose iron ore production is roughly twice the size of BHP - stood to gain a $5.8 billion ''equalisation payment'' from BHP. This was no longer viewed as adequate.

When the deal was cut in 2009, Rio was heavily in debt and had fallen afoul of its Chinese customers thanks to its infamous fall-out with Chinalco.

Since then, Rio has cut its debt by almost 40 per cent, its share price is strong and it has struck a $12 billion iron ore deal in West Africa with Chinalco.