THE biggest merger in Australian history is dead, with the board of Rio Tinto preparing to walk away from a $120 billion iron ore deal to join forces with rival mining company BHP Billiton in the Pilbara desert in Western Australia.
The aborted merger deal which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago was expected to meet opposition from European and Chinese regulators concerned about the impact of the miners' stranglehold on global iron ore prices.
But the major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP.
Sources close to the Rio board confirmed Rio was preparing to tell BHP of its decision yesterday. Rio chairman Jan du Plessis had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.
"They can't object to that," Mr du Plessis said. "That's kind of us stating our investment preference. They will no doubt have their own measurements and I think that's fine."
Although the market had speculated about the failure of the Pilbara deal since BusinessDay first foreshadowed its collapse in August, there had been no acknowledgement from either party that the merger was in trouble.
Now Rio, having canvassed the opinion of its major investors, is looking to save face.
"I think with regard to the JV and why it didn't succeed . . . we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn't possible.
"In short, I think we have a positive message we should spread . . . I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I'm not sure that gets us anywhere," Mr du Plessis told his fellow directors.
BusinessDay understands other directors agreed with the positive public strategy. One, Sir Rod Eddington, responded to Mr du Plessis, saying, "In fact the opposite Jan. I think it blows up in our face".
Besides needing the approval of regulators, the deal required approval from both BHP and Rio shareholders. And it was this which finally prompted the Rio board to move. Rio whose iron ore production is roughly twice the size of BHP stood to gain a $5.8 billion "equalisation payment" from BHP. This was no longer viewed as adequate.
When the deal was cut in 2009, Rio was heavily in debt and had fallen afoul of its Chinese customers thanks to its infamous fall-out with Chinalco.
Since then, Rio has cut its debt by almost 40 per cent, its share price is strong and it has struck a $12 billion iron ore deal in West Africa with Chinalco.
Frequently Asked Questions about this Article…
What happened to the proposed Rio Tinto and BHP Pilbara merger?
The proposed Pilbara merger between Rio Tinto and BHP has been called off — Rio’s board prepared to walk away from the $120 billion iron ore deal after concluding the joint venture would not proceed.
Why did Rio Tinto decide to kill the $120 billion deal with BHP?
According to the article, Rio abandoned the deal mainly because its financial position improved, it faced pressure from major shareholders, and the board concluded the terms favoured BHP rather than Rio.
How big was the deal and had BHP tried to buy Rio before?
The Pilbara joint venture was worth about $120 billion. It followed an earlier, unsuccessful $180 billion takeover bid by BHP for Rio that occurred two years prior.
Would regulators have allowed the Rio–BHP merger to proceed?
Regulators were expected to be a major obstacle: European and Chinese regulators were concerned the combined miners would strengthen their control over global iron ore prices, so regulatory approval was unlikely without major concessions.
What role did shareholders play in Rio’s decision to end the merger talks?
Rio canvassed its major investors before deciding. Shareholder pressure and the requirement that both Rio and BHP shareholders approve the deal were key factors prompting Rio’s board to move to end the proposal.
What was the $5.8 billion 'equalisation payment' mentioned in the article?
The $5.8 billion equalisation payment was the amount Rio stood to receive from BHP under the proposed arrangement to compensate for the fact Rio’s iron ore production was roughly twice BHP’s. By the time of the decision Rio’s board judged that payment inadequate.
How has Rio Tinto’s financial position changed since the deal was first cut in 2009?
Since 2009 Rio has significantly strengthened its balance sheet: it cut debt by almost 40%, its share price was stronger, and it secured a $12 billion iron ore deal in West Africa with Chinalco, all of which reduced its need to pursue the merger.
What should everyday investors take away from Rio cancelling the BHP merger?
For investors, the key takeaways are that Rio is in a stronger financial position than in 2009, shareholder sentiment can materially influence major corporate deals, and large mining mergers face heavy regulatory scrutiny. Investors should watch official company statements and any strategic moves Rio or BHP announce next.
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