Jeremy Warner: BHP's Rio tilt proves costly waste of time

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The Independent Online

Outlook The best that can be said about BHP Billiton's 11th- hour decision to abandon its hostile takeover bid for Rio Tinto is that at least Marius Kloppers, the BHP chief executive, has managed to avoid the folly of Royal Bank of Scotland's Sir Fred Goodwin, who despite the eruption of the worst banking crisis in living memory hubristically pursued the overpriced acquisition of ABN Amro to the bitter end.

It was an arrogance which cost Sir Fred his job when the newly acquired assets turned to credit-crunched dust in his hands. Mr Kloppers doesn't intend to fall into the same trap. Better to have tried and failed, he might say, than succeed at the expense of shareholder value, however damaging to pride the withdrawal might be after so much time and effort has been expended.

Yet this was in truth always a top-of-the-market bid of monstrously monopolistic intention that should never have been made in the first place. Mr Kloppers' predecessor, Chip Goodyear, wouldn't in a month of Sundays have embarked on such an impossibly ambitious endeavour, which was possibly why his chairman, Don Argus, was happy to see Mr Goodyear retire early so as to make way for the deal-hungry Mr Kloppers.

With the active encouragement of Mr Argus, Mr Kloppers embarked on the Rio bid the moment he got his feet under the desk, and a gloriously unproductive and costly waste of his first year in office it has proved to be. BHP cites the dramatic deterioration in commodity prices of the past six months as the main reason for its withdrawal.

Yet only a few weeks ago Mr Kloppers was arrogantly insisting that the merger plan was still on track and that, because his offer was all in shares, the dynamics and industrial logic of the merger had not been changed in any way by the collapse in prices. By yesterday, the script had changed as fundamentally as the price of iron ore. The continuing credit crisis had made Mr Kloppers concerned about the refinancing of Rio's $40bn of debt while the deterioration in commodity prices was undermining the cash flows that previously could have been relied upon to repay the debt from internally generated sources.

Yet BHP cannot entirely blame changed circumstances for its failure to push ahead with the bid. There were also key errors of judgement in underestimating the regulatory obstructions that would be put in BHP Billiton's way. Again, as recently as a couple of weeks back Mr Kloppers was expressing full confidence that he could steer the proposal through the European Commission with only minor conditions being imposed.

This has proved to be very far from the truth. We don't know exactly what the European Union was demanding by way of iron ore and other disposals, but it seems to have been considerably more than Mr Kloppers and his team bargained on, thereby undermining much of the deal's cost- cutting and monopolistic rationale.

The collapse in asset prices since BHP embarked on the takeover bid a year ago has also undermined BHP's chances of executing any disposals demanded by the commission at reasonable prices. Most of this was predictable. Nobody forecast the speed with which commodity prices would return to earth, but talk of a "supercycle" which would sustain turbo-charged demand into the indefinite future always looked fanciful.

No merger which has customers spitting tacks, as this one did, deserves to succeed and it was always likely that regulators would stick a spanner in the works. As it is, the collapse of the merger leaves the debt-heavy Rio Tinto looking more exposed than BHP. That won't be much consolation to Mr Kloppers. With his credibility damaged, he will have a mountain to climb next time he comes calling on markets to back his deal-making ambitions.

For the time being, the mining consolidation game has run its course. For some years to come, executives will have to confine themselves to the grubby old business of extraction and distribution, but that is rather what they are employed to do. In the meantime, the investment bankers and competition lawyers have managed to take Mr Kloppers for $450m in fees. If that's what it costs to fail, just think what BHP would have been charged for success in this always monopolistic and value-destructive escapade.

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