BHP abandons mining mega-deal

published 28 November 2008

It typically takes years for shareholders to discover how much value huge mergers destroy. But for investors in BHP Billiton (LON:BLT) and Rio Tinto (LON:RIO), "the bills have arrived much more quickly", said David Wighton in The Times. BHP has abandoned its £40bn all-share hostile bid for rival Rio Tinto. Over the past year BHP has spent £291bn and Rio around £100m on advisers, lawyers and arranging finance. "Perhaps the chief executive's bonus could be used to help pay for it," said one disgruntled BHP shareholder.

One reason the deal was pulled is the plunge in commodity prices, fuelled by dwindling demand from China; this has "ground to a halt in the past month", said Jim Lennon of Maquarie Bank. This negated the deal's main attraction, "driving up prices in a bull market", and damaged the firms' cash-flow prospects, said John Foley on Breakingviews.

Less cash flow would have made paying for Rio's debt load harder, while the credit crunch cast doubt on the refinancing of $9bn of its $38bn of borrowings. BHP also underestimated the "regulatory obstructions" to the deal from the European Commission, which seems to have required more disposals than BHP had expected, undermining the deal's rationale, said Jeremy Warner in The Independent. What an "unproductive and costly waste" of Cloppers's first year at the helm.