BHP-Rio tie-up said to be 'dead'

Now dust off the memory banks, because no doubt you remember the Rio Tinto and BHP Billiton JV proposal between their Iron Ore assets? Yes? No? Well, the Sydney Morning Herald is running the story BHP-Rio tie-up said to be 'dead'. Turns out that the regulatory hoops were always going to be the toughest obstacles to overcome. Remember that if there is no conclusion by the last day of this year, well then, the deal expires and the only folks who would have made any money, would have been the folks that drafted all of the documents. I hope that the docs were in electronic format.



But did you see that part with the quote from Tom "hands" Albanese. I call him hands because if he sat on them, that would be like hitting the mute button: "China already consumes twice as much steel as the US, Europe and Japan combined," Mr Albanese said. "By 2025, China will have built 10 cities the size of New York [and] may have 219 cities with more than 1 million inhabitants - compared with 35 in Europe today. What? 10 cities the size of New York? I hope that the infrastructure is better, it probably will be.



Perhaps more interesting is this dynamic, this story courtesy of Business Week: Potash's Doyle Would Get $445 Million From BHP Offer. And that is at 130 bucks a share. This would be the single biggest payout of any sort, ever. Ever. Not just in
recent times, but this would be the single biggest payout an outgoing chief would ever receive for a deal done. Does that actually mean that there have been founder owners that have not received that sort of payout? This is for chiefs, not for those types.



There was a case where United Healthcare chief William McGuire was set to make more, over a billion Dollars, but that was cut short. He was found out by a number of parties, trying to defraud investors by backdating stock options. Disgrace, plus the fellow was a medical doctor, does the oath cover all things financial too? I guess it does harm some folks, even if only in the pocket. Sis. But there are big ones outside of that mess, an old Cnet article details the biggest ever payouts, check out place two and three (bumped up after the McGuire thing went sour):



"Lee Raymond of ExxonMobil walked away with a $400 million payout. Huge number, but most of it is retirement independent and accrued over 40 years of employment and 12 years of running the company. And God knows, those were big years for the oil giant. Shareholders aren't complaining about this one." And then of course the other big one: "Home Depot chief Robert Nardelli's severance package was $210 million. The company's poor performance under Nardelli's six-year watch was widely publicized, but the party line was that his resignation was mutually agreed upon by Nardelli and the board. Who wouldn't agree to leave for that much money?"


The question then is, as a big shareholder himself, would the chief be swayed to accept a little sweetener, or want to be greedy and look for something closer to 160 bucks a share? Last night the stock (Potash Corp.) closed up a fraction at 148.84 Dollars a share. On paper Doyle is worth a lot more now. But I was once reminded by a client that a deal is not a deal 'till the money is in the till. And many a hostile deal has gone sour, you can't drum up the support of shareholders because they have known the board long enough. Maybe a stock sweetener to continue to participate in the long term fundamentals would be a good outcome.



I saw an analyst report that suggested that the EBIT (earnings before interest and taxes, think of it as operating income) contribution from a Potash division would be around 15 percent by 2015, listen to this, more than base metals. More than base metals? And it would smoke (excuse the pun) both coal divisions. And perhaps most importantly, as far as the board of BHP Billiton is concerned, reduce the reliance on Iron Ore, which next year should be close to a 40 percent contributor to group EBIT. Based on the acquisition at current levels, Iron ore would still be the largest contributor by 2015, but by less than one third. Balance and diversity.



There were a couple of people who suggested that a few more suitors could come in as a white knight for Potash Corp. I perhaps too boldly said that only BHP Billiton, because of their size might be the only ones to be able to do this deal. Both Vale and Rio Tinto were suggested to me by a couple of folks. Rio Tinto, shareholders have been burned with a monster debt load in the past and the deep discount rights issue will still make them feel kind of dirty. Rio Tinto has a market cap of 101 billion Dollars and debt levels of 12 billion Dollars, an extra 45 odd billion Dollars at current prices would be too much to bear. Annual EBIDTA of 11 billion Dollars. A flimsy argument, but you get what I am saying, it is like a Pelican trying to swallow a 50 kg Tuna.



OK, so Vale is more obvious, the company has a market capitalisation of 151 billion Dollars. At the end of the first half, Vale had net debt of 24 billion Dollars. Again, making a transaction of this size and scale seemingly too much. If you annualise their EBIDTA from H1 2010, you get to 10.1 billion Dollars. Compare this to BHP Billiton, now at 187 billion Dollars market
cap, EBDITA of 15.1 billion Dollars, and net debt as at the half year of 7.9 billion Dollars. So, by far and away the lowest gearing of all three of these companies. And the most diverse portfolio too. Just saying.



It is all happening. All over, a deal a dozen, what is this telling you if anything? Over the past few weeks there has been increased Mergers and Acquisitions activity. It is on the rise. This time around it is Intel the chip maker acquiring McAfee for 7.68 Billion Dollars. Sounds like a lot, nearly a 60 percent premium. But why? What would a security software company have in common with a chip maker?


I was trying to find if there was anyone who could make sense of this deal. I was trying to explain this on the box, and suggested, much like this FT article (now I am blowing my own crazy horn/vuvuzela) that chips are going to be in all big ticket durable goods. Think a chip in your TV and in your fridge. And being able to access it from your handset. Now you don't want anyone else to be able to mess with your fridges ability to defrost, or make more ice, or power off a fraction on a cold day. You don't want anyone to scramble your satellite reception, any software bug of any sort. So, if the security can be embedded on the chip, then that is a good outcome then? Right? Yip, check out the FT article: Intel to purchase McAfee for $7.7bn.



Wow, and then a Philly Fed Manufacturing read that rubbished the market in the US in the last hour of trade here. The Philly what? You know, description via Forexpros.com: "The Philadelphia Fed Manufacturing Index determines the economic health of the manufacturing sector in Philadelphia district. Any reading above 0 indicates improving conditions of the manufacturing sector, while a reading below 0 indicates worsening conditions. It's concluded from a survey of about 250 manufacturers in the Philadelphia Federal Reserve district."