Rio Tinto, BHP Billiton Axe Controversial Iron Ore Merger

Oct. 18, 2010
Rio Tinto said the European Commission, Australia, Japan, South Korea and Germany had all refused to approve the deal, which was also fiercely opposed by industrializing China, the world's leading iron ore consumer.

Mining giants Rio Tinto and BHP Billiton on Oct. 18 abandoned a controversial merger of their Australian iron ore operations after anti-competition complaints from regulators and top customers including China. The Anglo-Australian companies, both among the world's top three miners, said they were disappointed at the collapse of the $116 billion dollar deal, which was set to save $10 billion in shared costs.

"The large synergies from combining our West Australian iron ore assets with Rio Tintos have caused us to persevere in seeking to obtain regulatory approvals," said BHP chief executive Marius Kloppers. "However, it has become clear that this transaction is unlikely to obtain the necessary approvals to allow the deal to close and as a result both parties have reluctantly agreed to terminate the agreement."

Rio Tinto said the European Commission, Australia, Japan, South Korea and Germany had all refused to approve the deal, which was also fiercely opposed by industrializing China, the world's leading iron ore consumer.

"Some regulators have indicated they would require substantial remedies that would be unacceptable to both parties, including divestments, whereas others have indicated they would be likely to prohibit the transaction outright," Rio said.

The attempted merger follows BHP's $147 billion hostile bid for Rio which failed in November 2008 as the financial crisis took hold. Both companies said a $275.5 million break fee would not be payable as the decision to scrap the iron ore deal was taken mutually.

The joint venture in Australia's Pilbara region, a major source of iron ore for Asia's steel mills, was announced during the crisis in June 2009, as Rio struggled with debts after taking over Canada's aluminum group Alcan.

The merger was unveiled along with a $15 billion rights issue as Rio snubbed a $19.5 billion cash injection from its main shareholder, Chinalco.

BHP was slated to pay Rio $5.8 billion to make the companies equal shareholders in the deal, which was set to combine BHP's more productive mines with Rio's better infrastructure including railways and ports.

"You get a good front end from Rio and a good back end from BHP, and together you've got a supermodel," said Glyn Lawcock, an analyst at UBS in Sydney.

However, rocketing iron ore prices and China's success in shrugging off the global crisis have helped Rio and BHP to bumper profits, making the tie-up less attractive, according to experts.

Rio Tinto edged to an iron ore production record in the third quarter, while BHP's annual profits have more than doubled on the back of hot demand for commodities.

"The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing," said Rio Tinto chief executive Tom Albanese. "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."

The deal's demise had been widely expected after Rio and BHP both acknowledged problems with regulators.

Last month, they asked Australia's competition commission to delay ruling on the deal, which had a deadline of the end of this year, to give them more time to talk to other regulators.

In March, China jailed three Rio Tinto staff for bribery and stealing trade secrets during fraught iron ore talks, thrusting the high-stakes industry into the spotlight.

BHP is currently pursuing a hostile $40 billion dollar bid for Canada's fertilizer giant Potash, which has also sparked concerns from China, a major fertilizer importer.

Copyright Agence France-Presse, 2010

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