Dropping BHP-Rio dream ‘disappointing’

BHP Billiton chairperson Don Argus said the group’s decision to drop its plans to pursue rival Rio Tinto is a “disappointing outcome after so many months of very hard work”.

Addressing the group’s annual general meeting on Thursday morning, Argus reiterated the group’s statement two days ago announcing that its board no longer believes that completion of the offer for Rio Tinto is in the best interests of BHP Billiton shareholders.

“We have not changed our view of the basic industrial logic of the combination, or of the long-term prospects for natural-resource demand-growth driven by emerging economies, particularly China,” said Argus.

“Simply put, our decision was based on our assessment of the financial and value risks as a result of the continued deterioration of global economic conditions and the lack of any certainty as to the time it will take for conditions to improve,” he stressed.

When the group announced its ambitious plans to merge with Rio Tinto to create a resources “super major” in November 2007, the combination was said to be the most compelling in the resources sector with the potential of unlocking value not available any other way.

But as Argus reminded shareholders, the group said it would be disciplined and that we would only complete the transaction if it made sense for shareholders.

“Today we still believe that the industrial logic of the combination is sound. We also remain of the view that long-term demand for metals, driven by the longer-term growth fundamentals of emerging economies will be robust,” said Argus.

But what has changed is that the US subprime credit crisis has “evolved into an almost unprecedented global economic crisis” with the company noting several times during the last year the impact of short-term volatility and uncertainty of global markets for metals.

“The reality is that this situation has continued to deteriorate,” said Argus, adding that the board considered that the large debt position that would have resulted from the acquisition of Rio Tinto would create “unacceptable risk for shareholders in this environment”.

Focusing on aspects of the increased risk of this transaction, Argus said the financial risk stemmed from the fact that when the group launched the offer early in February this year, and after accounting for the proposed $30-billion buyback, the combined market capitalisation of the two companies would have been around $298-billion and the net debt around $87-billion.

But by last Friday, again after accounting for the proposed $30-billion buyback, the combined market capitalisation of the two companies would have been around $84-billion and the equivalent net debt number was around $78-billion. – I-Net Bridge

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