The decision by multinational resource group BHP Billiton (NYSE: BHP) to scrap plans to take over rival Rio Tinto (NYSE: RIO) is not only a shame given the amount of money and effort put into the deal by the suitor, but it is the second of two huge mergers gone sour lately in what could mark the end of an era of marriages between majors, according to analysts.
"The big surprise is how much money BHP Billiton has spent on legal and associated fees related to the deal," John Meyer, London-based analyst with Fairfax, told BNamericas.
"Roughly US$450mn is a really big waste of money for a deal that was never likely to be allowed to go through without very significant disposals from the combined entity," he added.
According to Meyer, European regulators in charge of approving, dismissing or setting conditions on the deal would have likely forced the combined company to rid itself of large portions to allow the merger, in order to comply with antitrust policies.
"What [BHP Billiton] should have done was wait for the European Union to give it advice before running up such bills. But I dare say [the company] would argue that it could not have gotten the full look at the deal without incurring the legal fees."
When the all-stock hostile bid was launched in February it was worth around US$147bn but by Tuesday, the day BHP Billiton aborted the operation, it was worth some US$68bn. Rio Tinto's shares fell 37% in London on Tuesday following the announcement.
For David Duckworth, London analyst with the CRU consultancy, the collapse of the merger - which followed Xstrata (LSE: XTA) ending its pursuit of South African platinum giant Lonmin in October - likely spells the end of the large-scale merger craze, at least until the global economic crisis blows over.
"People are just really worried about getting into more debt and you can't get credit from banks these days," Duckworth said in an interview. "[BHP Billiton] had gone a long way down the road [in the merger process] and then suddenly came to a stop."
Meyer agreed, saying "the party is now over."
BHP Billiton's assets in Latin America include 57.5% of the Escondida mine in Chile, the world's largest copper mine, in which Rio Tinto owns 30%. Both companies also have red metal assets in Peru and iron ore operations in Brazil, in addition to other holdings in the region.
No comments:
Post a Comment