BHP, Rio Likely to Abandon Iron-Ore Joint Venture, Lawyers Say

BHP Billiton Ltd. and Rio Tinto Group, the largest and third-largest mining companies, are likely to abandon plans to create an iron-ore joint venture after complaints from regulators, lawyers said.

Japanese and German antitrust authorities said yesterday they oppose the deal. The European Commission will also raise formal objections to the 50-50 venture, according to two people familiar with the situation.

“There is such resistance on a global scale and it’s all coming together at the same time,” said David Anderson, a Brussels-based partner at Berwin Leighton Paisner LLP, who isn’t involved in the deal. “It’s very difficult to imagine the transaction going through as currently proposed.”

Rio and BHP, the world’s second- and third-largest producers of iron ore, say they would save at least $10 billion in costs by combining their mines, railroads and ports in the remote Pilbara region of Western Australia. The deal requires regulatory and shareholder approval and has been opposed by steelmakers in Europe and Asia.

European Union regulators informed the companies today about the results of a preliminary antitrust probe, said Amelia Torres, a spokeswoman for the commission in Brussels. The EU agency may issue a formal complaint within days, said people with knowledge of the matter, who declined to be identified because the decision hasn’t been made public.

‘Next Steps’

“We can confirm that both BHP Billiton and Rio Tinto met the European Commission today,” BHP said today in an e-mailed statement. “Both parties will be giving full consideration to the matters discussed in the meeting. No decisions on next steps have been made.”

Tony Shaffer, a London-based Rio Tinto spokesman, couldn’t immediately be reached for comment.

BHP, based in Melbourne, and London-based Rio said yesterday they “noted with disappointment yesterday’s statement by the German Federal Cartel Office that its current intention is to prohibit” the venture.

The European steelmakers’ group Eurofer said today that the joint venture “could not be made to work in competition terms” because “it effectively would have created a duopoly with the global iron ore market in the hands of just two companies” with Brazil’s Vale SA as the only major rival to BHP and Rio for steel’s main ingredient.

Eurofer said it was “confident” the EU commission would soon follow Germany and prohibit the deal.

‘Uphill Battle’

“They were always on an uphill battle,” Matthew Hall, a partner at McGuireWoods LLP in Brussels, said of the joint venture. “These are obviously two of the biggest in the world with huge concentration of very important production assets.”

Hall said the companies’ offer to keep selling steel independently doesn’t seem to have done enough to allay regulators’ concerns about lack of competition “because they are selling from the same cost base.”

For BHP, this could be the second time that regulatory fears have forced it to ditch plans for Rio. It abandoned a $66 billion hostile bid for Rio in 2008 after the EU objected unless the companies sold off iron ore and coal assets. BHP blamed Rio’s high level of debt and economic uncertainty for its change of mind.

Paul Galloway, a mining analyst at Sanford C. Bernstein in London, said a full merger between the two companies could be possible in several years’ time when he says new iron ore suppliers may enter the market.

“You get a lower price environment where the steel mills aren’t hopping up and down, a more deconsolidated market which means the antitrust barriers are lowering,” Galloway said.

Takeover Offer

Ditching the joint venture makes it more likely that BHP could try a takeover offer again and accept the divestments demanded by regulators, Galloway said.

“The company would accept almost anything” to get higher volumes in the iron ore market, Galloway said in a telephone interview.

Berwin Leighton’s Anderson said the strong antitrust concerns from several global regulators about the deal mean there “would have to have a significant change in circumstances” to alter the market power of major iron-ore suppliers and make a deal possible.

The two companies agreed in June 2009 to the venture, with BHP agreeing to pay Rio a $5.8 billion so-called equalization payment. The original accord will terminate if the conditions of the deal aren’t satisfied by Dec. 31, the companies said when they announced the plan. The venture, initially due to be completed by mid-2010, has been delayed as authorities from Australia to Europe study the proposal.

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