BHP Billiton Drops $68 Billion Bid for Rio Tinto

Updated from 5:13 a.m. EST

By Rohan Sullivan

SYDNEY, Australia -- BHP Billiton(BHP Quote), the world's biggest mining company, abandoned a hostile $68 billion takeover bid for rival Rio Tinto (RTP Quote), blaming the global economic downturn and plunging commodity prices.

BHP said in a statement Tuesday that the board "no longer believes that completion of the offers for Rio Tinto would be in the best interests of BHP Billiton shareholders."

The Melbourne, Australia-based company launched a hostile, all-stock bid in February, offering 3.4 BHP shares for every share of Rio Tinto in a deal then valued at about $147 billion -- one of the world's biggest takeover offers. But the stocks prices of the two companies have plummeted since then along with global markets, and the bid's value shrank to around $68 billion.

BHP Billiton Chairman Don Argus said the global economic downturn made the deal too risky even though the company had not changed its mind about the "basic industrial logic" of combining the companies or the long-term prospects for demand for natural resources.

"We have concerns about the continued deterioration of near-term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value," he said.

BHP also said it understood that the European Commission would require it to sell some iron ore and coal assets before it would approve the deal.

"Given the current economic circumstances and uncertainty regarding our ability to achieve fair divestment values in the required time frames, these remedies would contribute to the cost and risk of the transaction," the company statement said.

BHP Billiton had received antitrust clearance for the bid from U.S. and Australian regulators.

"At the end of the day, for BHP to actually meet the European Commission's concerns was going to lead to sell-offs of key iron ore assets that would have destroyed the whole rationale for the merger in the first place," Gavin Wendt, a mining analyst with Fat Prophets in Sydney, told Australian Broadcasting Corp. radio.

Other factors that increased the riskiness of the deal included the level of debt the new company would have had compared with cash-flow, and concerns about the ability to sell Rio Tinto assets -- including Rio Tinto Alcan Packaging and Rio Tinto Alcan Engineer Products -- to retire debt.

"It is the short-term outlook that is uncertain and it is just not the time to be taking on the level of debt that exists on the Rio Tinto balance sheet," BHP Billiton CEO Marius Kloppers said on a conference call Tuesday.

Rio Tinto has about $40 billion of debt associated with its purchase of aluminum producer Alcan, while BHP Billiton has $6.3 billion in debt.

The takeover bid had alarmed resource customers -- especially Chinese steel makers -- who feared the massive combined company could unfairly influence prices.

Rio Tinto and BHP Billiton are the world's second and third-largest iron ore producers, respectively. A combination of the two Australian-based miners would have been bigger than Companhia Vale do Rio Doce(RIP Quote), the world's largest iron ore miner.

Rio Tinto has consistently opposed the bid. In a statement, the London-based company said it "will continue with its strategy of operating and developing large-scale, long-life, low-cost assets to generate significant value for shareholders."

Analysts said they were not surprised by the withdrawal of BHP Billiton's bid because of the rapid change in market conditions. The company may return for another tilt at Rio Tinto in the future, they said.

"I think it is great for BHP, I think it shows a sign of maturity that they're willing to cut their losses and get out of there before it costs too much," said DJ Carmichael analyst James Wilson.

Shares of BHP Billiton rose 14% at midday in London, where both companies are traded in addition to Australia. Rio Tinto shares had plummeted 36%.

BHP said it would write off 450 million Australian dollars ($285 million) in costs connected to the bid.