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BHP Billiton's all-share bid for Rio Tinto has finally been put out of its misery. The proffered reasons are predictable - uncertain markets, slower demand for commodities and the high level of debt the merged group would be carrying. But BHP also confirmed for the first time what everybody already suspected - European Commission competition clearance required divestments in the iron ore businesses central to the combination. We said in July that likely forced spin-offs from the two companies' core iron ore assets in Australia would shred the synergies justifying the acquisition cost and ensure it didn't happen.
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Investors should be relieved that the whole business is over. Mega-mergers like this, pushed through at the peak of the commodities price cycle by over-ambitious chief executives, have been the curse of the mining industry in the past. BHP should know this better than most - its mid-1990s acquisition of Magma Metals in the US was a case study in value destruction, albeit on a smaller scale. Of course, if the arguments put forward by BHP chief executive Marius Kloppers about the eventual synergies held any water, the market uncertainty would have made the deal more compelling, not less. But with a huge chunk of the touted cost savings resting on combining parallel ore operations in the Pilbara region of western Australia, consumers and competition watchdogs alike reacted with horror to the prospect of one company controlling two-thirds of seaborne ore supplies - prompting Chinese state proxy Chinalco to take a stake in Rio Tinto.
Final confirmation still saw Rio shares crash more than 40 per cent, to levels not seen since the middle of 2004. BHP Billiton shares gained around 10 per cent.
Shares in both companies are now at what look like bargain basement levels - Rio is now on a PE rating of 4.5 for this year and just over five for next. But analysts are likely to chop forecasts, and there are concerns about debt - its net debt was 133 per cent of net assets at the half year stage, and that could rise further if asset values are subsequently impaired. Fairly priced for now.
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-IC-1.6.1b-prod - 17/12/2008 12:46:12 - jonathan.furseftb
