BHP, Rio Drop Iron Ore Venture as Regulators Oppose

BHP Billiton Ltd. and Rio Tinto Group abandoned a plan to create the world’s largest iron-ore exporter after regulators from Europe and Asia were concerned it would limit competition.

The changes, including asset sales, demanded by regulators were unacceptable to both companies, London-based Rio said today in a statement. Melbourne-based BHP confirmed the end of the deal to combine the two companies’ mines, railroads and ports in Australia’s remote Pilbara region in a separate statement.

BHP and Rio, the world’s largest and third-largest mining companies, may miss out on more than $10 billion in savings by dropping the plan. It’s the second time BHP Chief Executive Officer Marius Kloppers, 48, failed to consummate a deal with Rio after scrapping a hostile $66 billion takeover bid in 2008.

“Rio has got more to gain from ending this deal because they have more infrastructure alternatives,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne, including BHP and Rio shares. The infrastructure “flexibility that Rio has was something that BHP wanted to leverage into in terms of fast-tracking expansions. Rio now holds the winning hand.”

Shares Fall

BHP declined 0.6 percent to 2,185.5 pence at the 4:35 p.m. close of London trading. Rio fell 1.5 percent to 4,080 pence.

BHP earlier slid 1.1 percent to close at A$41.18 in Sydney today, while Rio dropped 0.3 percent to A$82.98, paring its gain since the joint venture was announced on June 5, 2009, to 57 percent. BHP has risen 17 percent over the period.

Antitrust authorities in Germany and Japan last week said they opposed the deal. The European Commission was also likely to raise formal objections, two people familiar with the plan said last week. The companies were informed of the results of the commission’s preliminary investigation on Oct. 15.

The Japan Iron and Steel Federation welcomed the decision to scrap the venture, it said today in a statement. The tie-up would have hampered fair competition in the industry, it said.

“The full value of the synergies on offer from a 50-50 joint venture was a prize well worth pursuing,” Rio’s Chief Executive Officer Tom Albanese, 53, said today. “The regulators did not agree with us.”

No Break Fee

BHP had agreed to pay Rio $5.8 billion to form the venture in a so-called equalization payment. Neither company will pay the $276 million break fee, they said.

The two companies had agreed on the deal when Rio, battling high levels of debt, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and the joint venture. The deals allowed Rio to slash debt without selling bonds and stakes in its largest mines, defusing a backlash from shareholders and politicians.

“Marius Kloppers has totally underestimated how hard it would be to get these two deals done, the takeover and the joint venture,” Gavin Wendt, an analyst at Mine Life Resources, said today.

BHP abandoned its hostile bid for Rio two years ago, citing Rio’s high level of debt and economic uncertainty. Kloppers is now fighting to acquire Potash Corp. of Saskatchewan Inc., the world’s largest producer of the potassium-based crop nutrient. Potash Corp., based in Saskatoon, Canada, rejected BHP’s $130-a- share bid in August and has said it’s evaluating alternative options.

Pilbara Partnership

A Pilbara joint venture had been studied in 1999 and was a key driver behind BHP’s takeover bid for Rio, Citigroup Inc. said in a May 2009 report.

“The imperative at the time of the deal given Rio’s balance-sheet problems is not really an issue at this point in time given the strong commodity price environment,” Pengana’s Schroeders said.

The two companies have already agreed on a so-called Plan B, involving sharing infrastructure and blending ore, Paul Galloway, an analyst at Sanford C. Bernstein Ltd., wrote in an Oct. 15 report. BHP probably has more to gain from such an arrangement, according to the report.

Under a June agreement with the West Australian state government, BHP and Rio are allowed to blend product and share infrastructure. The legislation allowing such co-operation is expected to be introduced by the end of the year and the companies have committed to make the combined A$350 million payment agreed in June, Colin Barnett, the state’s premier, told reporters today in Perth.

Gains in Prices

The revised venture may save the companies $5.6 billion in costs, UBS AG said Sept. 21, compared with the joint venture which may have saved $11.5 billion. Most of the savings, or about $3.4 billion, would come from blending different types of iron ore, UBS said.

Fitch Ratings today maintained its credit ratings on BHP and Rio, saying the loss of the venture and its “significant synergies” didn’t preclude the possibility of cooperation between the companies in some form.

Gains in iron-ore prices in the 16 months since Rio and BHP proposed the deal mean Rio may benefit more than BHP from the venture’s collapse because it produces more of the steelmaking raw material, Schroeders said.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.