BHP seen pressing on with Rio bid despite crisis
Miner BHP Billiton’s may have to pay more for a $55-billion loan as the credit crisis deepens, but this is unlikely to force it to abandon its $95-billion all-share takeover bid for rival Rio Tinto.
Questions were raised about BHP’s stance after Xstrata cancelled its proposed acquisition of bumber three platinum producer Lonmin on Wednesday due to problems in arranging favourable loan terms due to the credit crisis.
BHP, however, had arranged its jumbo syndicated loan with a series of banks in February, well before the latest wave of financial turmoil hit markets and froze lending.
“The financing is in place, the letters of commitment are there. From a BHP perspective it doesn’t make any difference, except it will have to pay a higher margin,” said a London hedge fund manager who declined to be named.
“Yes, they’ll get hurt from it, it’s probably 1% or 2% more expensive to BHP, but the overall impact from synergies from the deal would be much larger.”
BHP first signed a loan agreement with seven banks on February 5 and signed an amended deal on March 31.
Barclays, BNP Paribas, Citibank, Goldman Sachs and HSBC are committed for $8,5-billion each, according to the agreement, while Santander agreed to $7-billion and UBS to $5,5-billion.
BHP, the world’s biggest mining company, needs the $55-billion loan to refinance $40-billion of debt that Rio took on to buy aluminium firm Alcan and to help fund a promised $30-billion share buyback once the deal is completed.
Although BHP’s facility is the single biggest such loan to be underwritten in Europe, the eventual increase to the overall debt market is not as big since Rio already has the $40-billion Alcan loan on its books, an investment banker said.
“Actually net-net there’s only an extra $15-billion that comes into the deal,” said the banker who heads his firm’s mining division, but declined to be named.
“For a name like BHP and the importance of the deal to it, I think it will by hook or crook have that money available to it.”
Margins on BHP’s facility were originally set at 50 basis points to 60 basis points, but this may go up to around 80 basis points, the hedge fund manager estimated.
Since February, loan pricing has skyrocketed.
On Friday, EDF said it had launched an £11-billion loan to back its takeover of British Energy, with pricing of 100 basis points to 110 basis points over LIBOR.
BHP’s margins would not be renegotiated, however, until it was ready to draw the loan, which would be January at the earliest, since that is when the European Union competition authorities are due to issue a ruling on the deal.
BHP’s takeover is an all-share deal, another key difference from Xstrata’s deal that fell through.
“Something that is starkly different is that Xstrata’s was a cash bid and BHP’s is all scrip,” said Andrew Driscoll, head of resources research at CLSA in Hong Kong.
That means the relative value of BHP’s offer for Rio has stayed fairly constant despite the lurching share markets which have hit both companies’ stock in the past few months.
Analysts say funding was probably not the only obstacle Xstrata encountered. The firm must have been very reluctant to follow through on its proposed bid of £33 per share for Lonmin when its target’s shares had crumbled to a discount of nearly 40% below that.
Shortly after announcing it would not make a formal bid on Wednesday, it scooped up more than 14% of Lonmin at under £20 per share, boosting its stake to 24,9% and setting the scene for a possible later bid.
BHP has consistently said that the rationale for the deal would not be hurt by a falling commodity market.
In fact, the proposed cost savings would be enhanced in a weaker metals market, BHP Chief Executive Marius Kloppers repeated again on September 19.
Likewise, on Thursday, Rio CEO Tom Albanese said the chaos on financial markets would not push Rio into BHP’s arms as a safeguard from falling prices.
He said Rio was in good shape despite the crisis and reiterated the firm’s rejection of BHP’s proposed offer as too low and undervaluing his firm. - Thomson Reuters