The BHP (BHP) Deal For Rio Tinto (RTP): The Coroner’s Inquest

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The BHP Billiton (BHP) offer to buy fellow mining company Rio Tinto (RTP) was one of the largest M&A deals in the known universe. At $62 billio,  it was colossal. The lover’s pursuit had gone on most of this year. BHP management saw billions of dollars in redundant costs and a big footprint in a metals market where prices would rise forever.

The transaction was the last, best hope that the corporate finance business was not as dead as a door nail. If a deal was just right it could still get done.

But, BHP walked away, driven out by nearly everything that ails the economy. Commodities prices are falling, squeezing margins at mining companies.There is no longer any ready credit to consummate transactions.

Those are the easy reasons, and many people would leave it at that. But, they are not the most important one. BHP had spent about $450 million on all of the ins and outs of trying to get the purchase complete. It must have dawned on management that, after ten months, its hostile move was not going to come to a good end no matter what the credit markets looked like. The RTP board wanted too much money. It would not sell at a "reasonable" sum no matter how many times it was assaulted by shareholders and reason. The deal died because, at the price BHP would have had to pay, the transaction never made any financial sense regardless of the rest of the economy.

Did RTP ask too much for the firm?  Its stock sold off 30% on news of BHP walking. The shares may come back, but it is a good gamble that it will take several years.

Douglas A. McIntyre