Markets Cry Foul As Deal Strikes Out

Sydney Morning Herald

Thursday November 27, 2008

Jamie Freed

BHP BILLITON'S annual meeting in Melbourne this morning promises to be an interesting affair.

Now that BHP boss Marius Kloppers's supposed "deal for all seasons" hasn't made it past this spring, shareholders will be wondering why he shelled out $US450 million ($698 million) in advisory fees and wasted 18 months of management time only to walk away from its move on Rio Tinto.

The Rio board will also face some tough questions.

Its United States-born boss Tom Albanese is lucky that he never agreed to define just what type of ballpark he was describing when he called BHP's initial 3-for-1 offer as "two ballparks" away from fair value.

Here's hoping the ballparks were actually Little League fields. And that he was thinking of his favourite London pastime - canal boating - when he said the increased 3.4-for-1 bid was "clear water" away from the fair value of the company.

Rio shares closed yesterday at a 1.54-for-1 ratio to BHP. The market fears Rio may need to undertake a large equity raising to shore up its debt-laden balance sheet.

With so much at stake, it is natural to try to determine which side should carry the burden of blame.

Is it BHP, which couldn't seal its decade-long quest to merge with its rival? Or is it Rio for its steadfast failure to bow to the seemingly inevitable?

So far, the London market has placed more of the blame on BHP's hubris and misguided assumption that it could get the deal past the European Commission with acceptable remedies, while Australian investors have been more scathing about Rio's failure to engage.

That is a natural function of the core constituencies of the companies: Rio has its head office, and most of its register, in London, while BHP has its headquarters and the majority of its shares in Australia.

In any case like this, hindsight is easy.

Maybe BHP should not have raised its offer in February and instead should have waited out the laborious European regulatory process before deciding whether to sweeten the deal.

But that was a different environment. Chinalco and Alcoa had just made a daring dawn raid on Rio's London stock and Rio's $US42 billion of debt looked far less onerous at a time when the credit market had yet to freeze over.

As for Rio, it could have chosen to engage in discussions with BHP in the hope of coming to a friendly agreed scheme of arrangement.

But Rio's chairman, Paul Skinner, made the fair point yesterday: even an agreed deal could have fallen apart in this market, particularly if the competition concerns were as severe as some suspect.

Retrospection is, of course, academic. The deal is dead and is unlikely to be revisited anytime soon after it failed, despite a tremendous financial cost and human effort.

So, after more than a year of drama, the companies - and the market - can finally move on.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home