BHP abandons Rio Tinto bid as markets collapse

BHP Billiton Ltd abandoned its year-long pursuit of Rio Tinto Group, blaming the rout in commodities prices and the credit-market squeeze for derailing the biggest hostile offer.

Marius Kloppers, chief executive officer of the world’s largest mining company, said the combination of $40 billion in new debt and regulatory hurdles made the $66 billion bid too risky at a time when the slowing world economy reduced demand for raw materials. Rio plunged as much as 40 per cent in London trading, while Melbourne-based BHP shares jumped 21 per cent.

When BHP announced the plan to buy Rio, commodity prices were heading to record highs and the Standard & Poor’s 500 Index was approaching its peak. Twelve months and $450 million of shareholder money later, Kloppers is confronting a 50 per cent drop in copper prices and a 45 per cent decline in oil as the world’s biggest economies face their first simultaneous recessions since World War II.

“When you combine all those factors, along with the decreased cash flow, you get to a situation where this is very difficult,” Kloppers said on Tuesday in a conference call from Melbourne. “We have an obligation to look at these value creating investments, but also we have an obligation to stop them when the conditions have deteriorated.”

BHP rose 149 pence, or 15.2 per cent, to 1,129 pence as of 10:18 am in London trading. Rio fell 39 per cent to 1,500 pence, valuing the company at 27.3 billion pounds ($41.3 billion). London-based Rio closed yesterday at a 27 per cent discount to the value of BHP’s proposal of 3.4 shares for each Rio, suggesting some investors were betting the bid wouldn’t proceed.

“BHP needs to focus on existing operations and I think going into an economic downturn they need to batten down the hatches and generate as much cash flow as they can,” said Jason Teh, who helps manage the equivalent of $5.7 billion at Investors Mutual Ltd in Sydney. He holds BHP and Rio shares.

“We note their comments,” Nick Cobban, a spokesman for Rio in London, said by phone. Rio, the world’s second-largest iron ore producer, rejected BHP’s sweetened, all-share offer on February 6, saying it undervalued the company and its growth prospects.

The hostile bid had angered iron ore customers including Posco, Korea’s biggest steelmaker, and JFE Steel Corp, ranked third worldwide.

The acquisition would have raised iron ore prices and should have been blocked by regulators, the steelmakers said.

“I was expecting this,” said Sajjan Jindal, managing director of JSW Steel Ltd, India’s third-biggest producer. “The steel industry has many players but there are few in iron ore, so it would have created a monopolistic market.”

The European Commission, the European Union’s antitrust regulator, was going to require so-called “remedies” from BHP to allow the bid to proceed, Kloppers said. The offer is still “live” until the commission decides to block it, he said.

“Even if they do approve it without remedies, we would ask our shareholders to vote against the deal,” he said.

The value of BHP’s offer slumped after peaking at $194 billion on May 19 as commodity prices dropped. Aluminum is heading for its biggest annual drop in 17 years. Contract iron ore prices are forecast to drop in 2009, according to analysts at UBS AG And Goldman Sachs JBWere Pty Coal is also predicted to decline.

“We have concerns about the continued deterioration of the near term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value,” Don Argus, BHP’s chairman, said today in a statement to the Australian stock exchange.

Credit-default swaps on BHP tumbled 130 basis points to 320, according to Citigroup Inc prices at 7:45 am in London. Contracts on Rio jumped 50 basis points to 800.

The swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline the opposite.

Aluminum Corp of China, the largest shareholder in Rio, said BHP Billiton Ltd‘s dropped takeover bid would benefit Chinese steelmakers.

“This is definitely good news,” Lu Youqing, vice president of the Beijing-based company, said today by phone. “We respect BHP’s decision.”

Chinalco, as the company is known, bought a 9 per cent stake in Rio with Alcoa Inc in February.