Thursday 27 November 2008

Kloppers ends up with bloody nose as BHP bid for Rio fails

Chief scraps deal amid regulatory hurdles and falling prices

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Guanyu said...

Kloppers ends up with bloody nose as BHP bid for Rio fails

Chief scraps deal amid regulatory hurdles and falling prices

Bloomberg in Melbourne and London
27 November 2008

Marius Kloppers’ Helpmekaar High School rugby team knocked seven opponents out of the match in the first seven minutes of the 1980 championship in Johannesburg.

Martin Kriegler, who played with Mr. Kloppers that day, said: “Marius accounted for most of them.”

Mr. Kloppers, now chief executive of BHP Billiton, took a hit on Tuesday when the company scrapped a US$66 billion hostile bid for Rio Tinto Group. Regulatory hurdles and falling commodity prices had made the deal too risky amid the worst financial crisis since the Depression.

Mr. Kloppers announced the bid on November 8 last year, just 39 days after he took over as chief executive of the world’s biggest mining company.

Had he been successful, he would have created a company that supplied 50 per cent of Asia’s iron ore and ranked as the world’s biggest producer of steelmaking coal, copper and aluminium.

“He’s definitely been given a bit of a bloody nose from this,” said Daniel Sacks, head of resources at Investec Asset Management. “I think it does tarnish his reputation a bit because there has been a big write-down on the cost of the bid.”

BHP and Rio Tinto, the second-largest iron ore exporter, have seen cash flows slump with commodity prices, making it harder to repay US$42 billion in new debt BHP would have acquired in the takeover.

The tipping point was copper’s 48 per cent drop over the past two months, combined with the European Union’s expected demand that the merged entity sell iron ore assets, Mr. Kloppers said this week.

“Commodity prices across our suite of products have dropped 50 per cent in the last six weeks,” Mr. Kloppers said. “It was just not the right time to be taking on the level of debt that exists on the Rio Tinto balance sheet.”

When BHP announced the bid for Rio Tinto, metals prices were close to record highs after six years of gains, and the Standard & Poor’s 500 Index was near its peak.

The S&P has since slumped 42 per cent in Sydney, matching the dip in BHP shares. Rio Tinto has fallen even more, down 64 per cent in London.

Mr. Kloppers’ retreat may turn out to be a blessing for BHP.

Barclays, Britain’s second-biggest bank, made an unsuccessful bid for ABN Amro Holding last year. It went on to buy the North American unit of bankrupt rival Lehman Brothers Holdings in September.

Royal Bank of Scotland, which bought part of ABN Amro for €14.3 billion (HK$143.98 billion), is being bailed out by the British government after the takeover raised its vulnerability amid mounting credit losses.

“He’s made the right move under the market conditions,” said Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group. “There will probably come to be a better time and structure to do this down the track.”

BHP rose 2.57 per cent to £10.78 (HK$128.70) in London late yesterday after surgintg 7.2 per cent to £10.51 on Tuesday. Rio Tinto fell a further 5.68 per cent to £14.62 after diving 37 pe cent, its biggest drop on record, on concern the failed bid will leave the company struggling to repay US$45 billion of debt used to buy Canadian aluminium producer Alcan.

“Rio is clearly the loser out of this,” Mr. Sacks said. “It didn’t look like that a year ago. But now they are heavily geared and exposed to the commodities that have performed the worst.”

BHP said it spent US$450 million of shareholder money and 18 months pursuing the takeover.

Now Mr. Kloppers needed to focus on BHP’s day-to-day operations, said Phil Aiken, the former head of BHP’s petroleum business.

Among the issues facing the firm are slower than expected output rises at BHP’s Ravensthorpe and Yabulu nickel mines in Australia, which contributed to a US$2.1 billion charge.