Tuesday, November 25, 2008

BHP-Billiton - Rio Tinto deal is off

On July 14 2007 I tipped a possible takeover bid for Rio by BHP-Billiton. On November 8 that year it happened. I got it wrong however in suggesting it likely that eventually some sort of deal would be done. In dramatic news yesterday the 3.4 BHP-Billiton shares for 1 Rio Tinto shares bid was abandoned. As it turns out too my conditional argument that Rio Tinto was a cheap way of getting into BHP-Billiton provided the takeover goes through, although correct, is now irrelevant since the deal is not going through. In fact, those who punted on the takeover going through are taking a caning - Rio were off 36% in London when I looked at 12-46pm (London Time) - the biggest drop in 20 years. There will be fallout from this alone. I'll watch Rio with interest on the ASX tomorrow.

Currently Rio is trading at 1.4 times the value of a BHP-Billiton share - the terms of the merger implied a valuation of 3.4 times. Apart from having the bid abandoned Rio is stuck with the $35 billion dollar debt resulting from the top-of-the-market takeover of Alcan last year. BHP-Billiton has only $6 billion in debt and is a much bigger company.

This outcome suggests to me that the takeover was possibly not a good deal at all for BHP-Billiton and that Rio Tinto by playing hardball in negotiations with BHP-Billiton severely disadvantaged their own shareholders. I cannot believe that the possible monopoly and synergy benefits were worth 36% of Rio's capitalisation.

The Chinese who bought a massive slab of Rio script to help thwart the takeover paid over-the-top prices and are caught with their pants down. Their 7 billion pound stake is now worth about one quarter of that. The steel makers however can rejoice a little since the possibility of a world's resources monolith is no more. Fascinating stuff and congratulations to BHP-Billiton directors and management for not being wedded to a dubious deal.

A few insiders seemed to have got a sniff of what was happening - BHP-Billiton shares surged strongly in the days prior to the announcement.

10 comments:

Spiros said...

"A few insiders seemeed to have got a sniff of what was happening - BHP-Billiton shares surged strongly in the days prior to the announcement."

Maybe, but at $20 they were obviously underpriced anyway. You would not have needed to know that the deal was off to buy BHP.

jc said...

it's a magnificent non deal. It's the best non deal since Micotheft walked away from yahoo.

jc said...

Rio is in trouble with that debt.

I read that Alcan on present indications is worth around 5 billion. They paid 40 odd.

This is a disaster for Rio.

derrida derider said...

"..congratulations to BHP-Billiton directors and management for not being wedded to a dubious deal."

What? Surely that should read "BHP-Billiton directors and management should be sacked for ever contemplating such an obviously stupid deal".

It was always obvious that they would have to pay far too much to get Rio. It was always obvious that downstream customers would buy shares to block it. It was always obvious that the competition regulators wouldn't allow it.

And that's all before you even look at the tremendous hidden costs and lousy historical record of mega-mergers.

Spiros said...

Rio is down 30% today.

BHP's P/E is now 9.84 and Rio's is 4.75.

Rio will be back up tomorrow. You can put your house on it.

Anonymous said...

agree with DD.

Fancy wasting US$450m on a deal that was never going to work given the credit crisis.

jc said...

homer

the deal wasn't hatched during the credit crisis, dopry.

Anonymous said...

JC,

When did they pay the money?

Duh

This was dead from August 2007

Anonymous said...

BHP Billiton made the offer in february 2008.

Credit crisis starts in August 2007.

JC as accurate as ever

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