BHP abandons Rio

Don Argus, BHP Billiton's chairman, tried to call Paul Skinner, his counterpart at Rio Tinto, to warn him that the miner was abandoning its $62bn hostile bid – but ended up leaving a message on his voicemail. Even if Mr Skinner had been available, he would not have been surprised at the news. The writing has been on the wall for the sector's biggest takeover in recent months as equity markets and commodity demand caved in and credit ran dry. A year after Marius Kloppers, BHP's chief executive, boldly sketched the deal in the twilight hours of the commodity supercycle, his board has clearly taken fright.

But why? After all, BHP repeatedly stressed that, since its bid for Rio was an all-share deal, the absolute level of equity markets was irrelevant. So, too, were commodity prices and, therefore, end demand. Indeed, weaker conditions were supposed to make the deal even more attractive because the capitalised value of the synergies as a proportion of the combined company would rise. There must have been other reasons for walking away. Perhaps BHP was worried that diminishing cash flows made taking on additional debt unwise – Rio's all cash purchase of Alcan, the aluminium producer, left it with almost $40bn of net debt. Planned (or forced) divestments are also trickier in a downturn

A bigger obstacle, however, might have been the European Commission's ponderous antitrust process. Investment bank Liberum Capital reckons BHP gravely misread from the outset the complexity of the antitrust issue. That probably gives BHP too little credit: its advisers surely gleaned a few useful steers from European regulators. (And such were the synergy benefits from the entire combination that BHP would have willingly given up quite a bit). Something for Mr Kloppers to consider as he mulls over the $290m paid to BHP's panoply of high-octane bankers and lawyers over the past 18 months. Only the other day, he gave the impression the deal was on. Mr Kloppers must hope that Mr Argus's next call does not herald another parting of the ways.

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