On June 5, 2009, BHP Billiton and Rio Tinto signed core principles to establish a production joint venture covering the entirety of both companies’ Western Australian Iron Ore assets. This resulted in the signing of definitive agreements in December 2009. The completion of these agreements was subject to a number of conditions, including regulatory approvals.
Since the agreement was signed it has become increasingly apparent that regulatory approvals of the joint venture are unlikely to be achieved. Consequently, BHP Billiton and Rio Tinto have reluctantly agreed to dissolve the proposed joint venture.
BHP Billiton Chief Executive Officer, Marius Kloppers, said, “The large synergies from combining our Western Australian iron ore assets with Rio Tinto’s have caused us to persevere in seeking to obtain regulatory approvals. However, it has become clear that this transaction is unlikely to obtain the necessary approvals to allow the deal to close and as a result both parties have reluctantly agreed to terminate the agreement”.
Kloppers said he appreciated the high level of cooperation and goodwill displayed by Rio Tinto in pursuing the joint venture. The parties have mutually agreed that no break fee is payable.
While both companies were progressing approvals for the joint venture, they have continued to invest in their Western Australian Iron Ore businesses.
Rio, in itsa press release noted: “Both parties have recently been advised that the proposal would not be approved in its current form by the European Commission, Australian Competition and Consumer Commission, Japan Fair Trade Commission, Korea Fair Trade Commission or the German Federal Cartel Office.”
Some regulators have indicated they would require substantial remedies that would be unacceptable to both parties, including divestments, whereas others have indicated they would be likely to prohibit the transaction outright.
Tom Albanese, Chief Executive, Rio Tinto, said: “The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing. Both companies have worked hard together over the last 16 months in a positive spirit to demonstrate its pro-competitive effects and I am disappointed that ultimately the regulators did not agree with us.
“Rio Tinto has exceptional operating assets and expansion potential in the Pilbara and we are already pushing ahead with a major development program. We also have a range of very attractive growth options across all of our product groups, with investment of more than $13 billion in capital projects planned over the 18 months to December 2011.”
Ambrian commented that in valuation terms, “we think there will be no loss to analysts’ modelling on this morning’s news given that, whilst doubtless, their would have been great operational synergies delivered by a logistical tie-up in the Pilbara (geology aside, Tier One iron ore margins are all about logistics), the market never had a feel for the value of these synergies. Instead, an opaque ‘$10 billion of savings’ guidance from BHPB over an undefined time period. Additionally, this of course now means that Rio Tinto no longer stands to receive a $4-6 billion in cash as a balancing payment from BHPB to equalise asset valuations in the Pilbara, as originally stipulated by the JV. We doubt whether any analyst was presumptive enough to factor this into Rio Tinto’s future cash flows either.
“What might not be commented on this morning, amongst the barrage of commentary that will no doubt follow this announcement, is perhaps some of the concessions that were probably made in conjunction with a move towards reducing the anti-competitive nature of a BHPB-Rio’s JV in the Pilbara.
“The first of these was a review of the logistical infrastructure that the two companies have historically used to secure dominance in the region. The review by the Australian Competition Tribunal resulted in the request that the companies had to give up sole access rights to the Goldsworthy (a Rio/BHPB JV) and Robe River (Rio JV with third parties) rail lines.
“The second of these concessions was to agree to pan-Pilbara royalty rates – which were increased from 3.75% of sales revenue to 5.625% for fines (3.25% to 5.0% for Beneficiated Ore) and up to 7.5% for lump royalty.
“It is doubtful that these concessions will be given back and thus…..the true cost of the failed deal is not simply just some: meaty lawyers and corporate advisory fees. It is also perhaps, a notch (albeit very small) out of the operations’ global competitiveness.”