By Jason Simpkins
BHP Billiton Ltd. (BHP) yesterday (Tuesday) received a formal complaint from the European Commission that detailed antitrust concerns about the mining giant’s proposed buyout of Rio Tinto PLC (RTP). Despite a sharp decline in commodities prices, BHP will likely make every effort to move on with the deal, which could mean selling some of its assets.
A year ago this week that BHP, the world’s largest mining company, went public with its bid for Rio Tinto, the world’s second-largest mining company. The offer allotted three BHP shares for each share of Rio Tinto – a deal that valued Rio at roughly $127 billion. Rio rejected the offer, but BHP returned in February with a sweetened offer of 3.4 BHP shares for each share of Rio Tinto. That offer, worth about $147 billion, was also rejected.
Rio insisted that both BHP offers "significantly undervalued Rio Tinto and its prospects," particularly iron ore. Rio Tinto Chief Executive Officer Tom Albanese noted in January that his company achieved record high production for iron ore, alumina, aluminum, bauxite, gold and copper in 2007. The company said it produced 145 million tons of iron ore last year, a 9% increase over 2006.
However, commodity prices across the board have retreated from the record highs reached earlier this year, which might make BHP’s offer slightly more appealing.
Stock valuations have plummeted as well. And at current prices, Rio Tinto is trading at a 24% discount to the value of BHP’s all-share offer.
Rio Tinto has given no indication that it has warmed up to the BHP bid, but Albanese did acknowledge a significant decline in demand from China. During a mining trip in Africa, Albanese told Bloomberg News that the slowdown in China’s economy has been more pronounced than initially thought.
“[China’s economy] is decelerating more in the fourth quarter than we saw in the third quarter,” Albanese said in an interview at the company's ilmenite mine in Madagascar. “That is going to lead to a deferred pickup in cumulative demand for most of the things we produce during the course of 2009.”
China’s economy registered a solid GDP expansion of 9% in the third quarter – a noticeable step down from the torrid 11.9% pace set in 2007.
If BHP succeeds in its takeover attempt, it would gain control of the largest aluminum producer in the world, which Rio became by successfully bidding for Canada’s Alcan Inc. for $38.1 billion last year.
It would also control 14% of the world’s thermal coal and 13% of the worldwide copper supply. More importantly BHP-RioTinto would dominate 38% of the seaborne iron ore trade.
That’s why regulators would like to see BHP divest some of its current iron ore holdings before it approves any merger. After a five-week preliminary review in July, the commission said that it had “serious doubts” about a combination that would control more than one-third of the world’s iron ore exports.
Some analysts have pointed out that the EC has previously approved takeovers after sending a list of objections and without demanding changes or divestments. But this is not likely to be one of those cases given the global magnitude of this particular merger.
“I think BHP will review the objections and seek remedies for them,” Tobias Woerner, an analyst at MF Global Securities told the New York Times. “At least BHP hasn’t rejected the objections out of hand and walked away from the deal. The objections should be manageable, but we don’t know what other factors will be at play here.”
News and Related Story Links:
- Money Morning:
The Iron Giant That Could Challenge the Chinese Mega-Market
- Money Morning:
Rio Tinto: New BHP Offer Neglects its “Underlying Value”
- Money Morning:
Mining Companies Stock Up On Iron Ore Assets