Noted: Why BHP won’t revisit Rio

November 20, 2009

The year-long ban BHP Billiton has had on revisiting a takeover of rival miner Rio Tinto will soon end, but it seems as if the moment has passed. Liberum and Investec said earlier this week that most of the synergies were captured anyway by the duo’s iron-ore joint venture.  If regulators nix that deal, analysts say a full takeover could be back on — but how that would pass muster if a JV doesn’t is not clear. On Friday, Credit Suisse joined the chorus of disapproval, saying a takeover would cut BHP’s return on equity (ROE) in half. From the CS note:

“We have re-run the numbers on an all scrip BHP Billiton takeover of Rio Tinto at a 30% premium (2.3 BHP shares for each RIO share). We see such a deal as materially EPS dilutive (by 12% even after year 3) and would significantly decrease BHP’s return on equity (from 25% to 12%).

“We do not see BHP making another takeover offer for RIO because: (i) The iron ore JV should capture many of the synergy benefits expected from the possible merger. (ii) If the iron ore JV fails on account of not passing regulatory hurdles similarly then we do not see a takeover receiving regulatory passage. (iii) We do not foresee shareholder support for the deal (and any such deal would use BHP script) with the potential EPS dilution and ROE erosion significant. (iv) Non-availability of sufficient credit facilities.

“We see a reinstatement of the buyback as a more preferable option for BHP shareholders than another tilt at RIO. A buyback of US$18bn in FY11 would be 7% EPS accretive and return gearing to a more normal level of 25% (BHP is debt free by end FY11 on our current forecasts).”

One comment so far | RSS Comments RSS

When is this BHP – Rio non-news coverage going to stop ?There is nothing to report. BHP and Rio Tinto aren’t merging.The only possible explanation for more than two years of non-event coverage is that either BHP or Rio Tinto are paying to keep the non-event story alive in the media.


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