Rio Tinto tanks as BHP Billiton scraps mega-bid

Shares in Rio Tinto plunged today after BHP Billiton walked away from its proposed $66bn hostile bid...

Last Updated: 31 Aug 2010

BHP blamed regulatory pressure and falling commodity prices for its decision to call off the bid, which would have been worth about $66bn based on the two firms’ respective share prices yesterday. Apparently the European Commission told BHP that it would have to sell off some of its existing businesses to get the deal past the competition regulator – and now commodity prices have fallen from their previous highs, clearly the sums no longer add up.

When the prospective deal was announced, just over a year ago, the merger would have been worth more than $140bn – one of the biggest corporate tie-ups in history. However, the continuing falls in commodity prices have hammered the share prices of both companies, and the deal was now worth less than half as much. BHP CEO Marius Kloppers insisted that the tie-up was still compelling in principle, but too expensive in practice – even at this lower price. ‘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 today.

BHP would have been forced into divestments both to satisfy the EU competition regulator, and to pay down some of combined group’s debt pile. The EU would apparently have forced it to sell some of its iron ore and coal assets, and BHP doesn’t think it would have been able to get a decent price for them in the current climate. Kloppers also highlighted falling prices for the commodities produced by the two miners, pointing out that copper has fallen 21% in the last month alone (after a 43% drop in the preceding year).

After spending the last year telling everyone what a great deal this was, this U-turn will be a bit embarrassing for Kloppers; apart from anything else, BHP has spent about $450m pursuing it. But with demand falling dramatically around the world in recent months – BHP recently admitted that the Chinese had asked to defer some iron ore shipments, and analysts are already starting to downgrade its profit forecasts – it’s no surprise that it’s decided to err on the side of caution. What’s more, the cash-rich company still has plenty of money to chase other deals. Either way, the market seemed to approve of today’s decision – BHP’s share price promptly shot up 15% this morning.

No such luck for Rio however, which immediately saw its shares tank by 40%. Its share price has been propped up by these merger talks, so it’s no surprise that BHP’s decision to walk away has sent it plummeting...

In today's bulletin:

Isn't that rather reckless, Darling?
Mortgage worries mount as lending slumps again
Rio Tinto tanks as BHP Billiton scraps mega-bid
JD Sports pounces on ailing rival JJB Sports
Darling to increase NI to fund £20bn spending binge

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