BHP’s strategic success

from takeover failure

February 15, 2011

If there’s one thing the latest WikiLeaks missive reveals about BHP Billiton, it is that the company’s much derided takeover strategy hasn’t been the disaster that many large shareholders claim.

BHP supremo Marius Kloppers no doubt is smarting over the leaked cables from US consul general Michael Thurston back to his masters in Washington. They reveal the kind of candid comments one would expect in a meeting between a corporate heavyweight and a representative of the US government on sensitive issues regarding the world’s fastest-growing economy, China.

But the leaked cables also highlight just how successful BHP was in railroading the contentious tie-up between Rio Tinto and the Chinese government-owned Chinalco, a deal that would have been disastrous for Australia’s national interests and that would have seriously undermined BHP’s ability to operate in China.

BHP’s big institutional shareholders, particularly those in the UK, have made it clear that they have been underwhelmed by the vast millions of dollars spent on advisers and consultants since 2007 on three massive merger proposals that never eventuated. In recent months, they have called for a halt to the mega mergers and insisted the company return a large part of the cash being generated by the resources boom.

In particular, many questioned the wisdom of BHP’s much vaunted joint venture proposal with Rio Tinto’s West Australian iron ore operations. Why proceed down that path when it was clear European regulators raised objections about that very issue two years earlier when BHP launched its hostile takeover bid for Rio Tinto?

The answer is now clear. To stymie Chinalco, BHP needed to offer Rio Tinto an alternative. It needed to offer its great rival a compelling reason to dump the Chinese government, a legally binding, superior offer that Rio directors could not refuse.

At the time, Rio’s new chairman Jan du Plessis was looking for an exit strategy from the China deal. With commodity prices rebounding, the Chinalco deal – struck out of desperation by a debt-laden Rio – was looking even less attractive and Rio shareholders were in open revolt.

Kloppers handed him the perfect opportunity. And while much of the attention focused on the potential synergies of the iron ore merger, the real value rested in severing the link between the Chinese government and Rio Tinto, a link that would have delivered the world’s biggest consumer of iron ore control of the world’s primo deposits.

The value for BHP in successfully killing that deal? Immeasurable.

Sourced & published by Henry Sapiecha

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