What is the big news this morning? We’ll need to think about that one for a while.
In the meantime there is the small matter of BHP Billiton [ASX: BHP] pulling out of the takeover of Rio Tinto [ASX: RIO].
Let’s be honest, it isn’t a major surprise. For some time the market has doubted that the deal would go through. Based on yesterday’s BHP share price Rio should have been trading closer to $90 a share rather than the $63.90 that it closed at.
Chairman Don Argus summed up the reasons for the decision:
“We have said that we would only seek to complete the transaction if it was in the best interests of BHP Billiton’s shareholders. While we have not changed our view of the basic industrial logic of the combination, or of the longer term prospects for natural resource demand growth driven by emerging economies, 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.”
After Mr. Argus finishes his stint as BHP chairman he may want to consider giving the circus a try. Because that’s the best example of tightrope walking we’ve seen in a while.
In effect the statement reads, “Not making the acquisition is now good, but we still think the resources sector is going to boom… only not right now, but in the future. Honest.”
Now the story is over and the papers and web pages are stuffed stories about the “Bid Collapse” and “BHP scraps $150bn tilt at Rio Tinto” we think about what the real reason for backing out is.
After all, $450 million is a lot of money to spend on putting the deal together. And it is also a lot of money to just write off by backing out of the deal.
So, three points stand out. First, it is a crappy market for one resources company to be taking over another. Second, Rio Tinto has a big stack of debt - $9 billion due to be refinanced by next October. And third, when you combine the first two it just doesn’t make much sense to proceed… for now.
We’ve got no idea what is going on in the mind of Don Argus and Marius Kloppers, but we would be surprised to see BHP come back with a new deal once the market has steadied and once Rio has tidied its books up.
It may mean paying more. And they could even miss out all together if China Inc decides to have a go. But there is just as much chance of BHP picking up a leaner, meaner and possibly less indebted Rio at a later date even if it does involved paying a premium.
Better that than getting lumped with $70 billion worth of debt in a falling resources market.
Australia’s Apollo 13 ‘Moment’
“Is this a new $800 billion the Fed and Treasury are stumping up?” I asked Daily Reckoning editor Dan Denning this morning.
“Yep” he replied.
This time it is to support the credit card and mortgage debt collateralisation markets. Roll back the clock three months ago when the $700 billion TARP was first proposed and there was almost universal shock and alarm that the government could spend that much on bad debt.
Today $800 billion seems like a drop in the ocean. There’s no vote in Congress, no suspension of Presidential campaigning, no special TV programmes. In fact it doesn’t even make the top story on Yahoo! Finance.
We imagine it to be like the space race in the 1960s and 1970s. Everyone stood up and paid attention the first couple of times, but as more and more missions were scheduled the public took less and less interest. Until Tom Hanks got into trouble on Apollo 13 and the world watched again.
We’re not sure whether the market has had its “Apollo 13″ moment or not yet. With any luck last week was it.
The issue for Australia is not so much whether the US government can repay all its debts (clearly it can’t) but how closely the Australian federal government is watching. Is it picking up ideas, and working out ways to spend and increase government debt?
If it is like most governments it will try to get away with as much as it can, all in the ‘national interest.’
