BHP pulls out Rio bid as commodities crash

MELBOURNE: BHP Billiton abandoned its year-long pursuit of Rio Tinto Group, blaming the rout in commodities prices and the credit-market squeeze for derailing the biggest hostile offer.

Marius Kloppers, chief executive officer of the world���s largest mining company, said the combination of $40 billion in new debt and regulatory hurdles made the $66 billion bid too risky at a time when the slowing world economy reduced demand for raw materials. Rio plunged as much as 40% in London trading, while Melbourne-based BHP shares jumped 21%.

When BHP announced the plan to buy Rio, commodity prices were heading to record highs and the Standard & Poor���s 500 Index was approaching its peak. Twelve months and $450 million of shareholder money later, Kloppers is confronting a 50% drop in copper prices and a 45% decline in oil as the world���s biggest economies face their first simultaneous recessions since World War II.

���When you combine all those factors, along with the decreased cash flow, you get to a situation where this is very difficult,��� Kloppers said today on a conference call from Melbourne. ���We have an obligation to look at these value creating investments, but also we have an obligation to stop them when the conditions have deteriorated.���

BHP rose 149 pence, or 15.2%, to 1,129 pence as of 10:18 a.m. in London trading. Rio fell 39% to 1,500 pence, valuing the company at ��27.3 billion ($41.3 billion). London-based Rio closed yesterday at a 27% discount to the value of BHP���s proposal of 3.4 shares for each Rio, suggesting some investors were betting the bid wouldn���t proceed.

���BHP needs to focus on existing operations and I think going into an economic downturn they need to batten down the hatches and generate as much cash flow as they can,��� said Jason Teh, who helps manage the equivalent of $5.7 billion at Investors Mutual Ltd in Sydney. He holds BHP and Rio shares.

���We note their comments,��� Nick Cobban, a spokesman for Rio in London, said by phone. Rio, the world���s second-largest iron ore producer, rejected BHP���s sweetened, all-share offer on February 6, saying it undervalued the company and its growth prospects.

The hostile bid had angered iron ore customers including Posco, Korea���s biggest steelmaker, and JFE Steel Corp., ranked third worldwide. The acquisition would have raised iron ore prices and should have been blocked by regulators, the steelmakers said.

���I was expecting this,��� said Sajjan Jindal, managing director of JSW Steel Ltd., India���s third-biggest producer. ���The steel industry has many players but there are few in iron ore, so it would have created a monopolistic market.���

The European Commission, the European Union���s antitrust regulator, was going to require so-called ���remedies��� from BHP to allow the bid to proceed, Kloppers said. The offer is still ���live��� until the commission decides to block it, he said.