Melbourne: BHP Billiton and Rio Tinto scrapped their proposed $116 billion iron-ore joint venture as expected, caving in to opposition from regulators, steelmakers and major investors 16 months after unveiling the plan.
The collapse of the deal marks top global miner BHP’s second failed attempt to grab a piece of Rio Tinto’s superior iron ore assets in three years and puts its focus squarely on a $39 billion hostile bid for the world’s biggest fertiliser maker, Potash Corp.
Rio and BHP, the world’s second- and third-largest iron ore miners, had touted the deal to combine their operations in Western Australia as essential, arguing it would have reaped more than $10 billion in savings.
“The failure of the joint venture will be slightly more positive for Rio than BHP, but it’s important to remember it’s actually a negative for both companies,” said Ben Lyons, an analyst at ATI Asset Management.
The two companies could pursue moves to share infrastructure and blend iron ore in Western Australia, under a recent agreement with the state government, which would yield at least half of the savings prized in the joint venture plan. But it is not a given.
BHP and Rio would have to review regulators’ objections to their joint venture to gauge whether any other collaboration would be allowed before going ahead with what analysts have called plan B, a person close to the process said.
The decision to call off the deal has been widely expected after European regulators indicated they would block the deal.
Analysts have been stripping the joint venture out of their BHP and Rio models over the past several months, so the share price reaction was muted on Monday.
“The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing,” Rio Tinto chief executive Tom Albanese said in a statement on Monday.
“Both companies have worked hard together over the last 16 months in a positive spirit to demonstrate its pro-competitive effects and I am disappointed that ultimately the regulators did not agree with us,” he added.
Rio and BHP have been going ahead with production expansions independently, with Rio having already committed around $1 billion as it prepares to boost output by about 50 % to 330 million tonnes of iron ore a year.
The statement said both parties had recently been advised their proposal would not be approved in its current form by the European commission, Australian competition and consumer commission, Japan fair trade commission, Korea fair trade commission or the German federal cartel office.
“Extensive discussions with the European commission indicated the companies would not be able to go ahead with the joint venture without large divestments, which would have destroyed the synergies and eroded long term growth options,” the source close to the process said.
“With that in mind, both parties didn’t think that was acceptable.”
Production from the joint venture would have eclipsed top iron ore miner, Brazil’s Vale. Steelmakers cheered the outcome on Monday.
“We were concerned about the monopoly of a proposed joint venture of Rio and BHP. We are relieved that the deal is not going to happen,” said a spokesperson at South Korea’s POSCO, the world’s no.3 steelmaker.
Based on a UBS forecast for a 1 billion tonne seaborne iron ore market in 2010, Rio Tinto would make up 25 % of the market, BHP would make up 15 % and Vale about 30 %.
Rio agreed to the joint venture in June 2009 at a time iron ore markets had slumped and it was desperate to pay down $40 billion in debt it had taken on with its ill-timed takeover of Alcan.
The company has sinced slashed its debt pile and iron ore markets have improved sharply, making the iron ore joint venture less appealing to its shareholders, who saw BHP as the big winner in the deal.
“BHP will be worse off, rather than Rio,” said Ric Ronge, a portfolio manager at Pengana Capital, which owns shares in both Rio Tinto and BHP.
BHP tried to take over Rio Tinto in 2008, but called off that hostile bid when the global financial crisis hit around the same time the European regulators raised concerns about the deal.
The company had said it was confident of winning regulatory approval this time around, but investors were never that certain.
“It certainly is a bigger blight on BHP’s management than Rio’s - their inability to consummate a deal for the second time,” said James Bruce, portfolio manager at Perpetual Investments.
BHP shares fell 0.7 % to A$41.38, while Rio Tinto’s shares slipped 0.2 % to A$83.01 in a broader market that was down 0.4 %.
“It’s not like they’re ex-growth, this just reduces the flexibility of their potential growth options,” said ATI’s Lyons of the impact on BHP.
Rio Tinto and BHP agreed to call off the joint venture without triggering a $276 million break fee.