*BHP Billiton and Rio Tinto JV – Blocked by

Regulators!

*About the Companies

Australian multinational mining and petroleum company headquartered in MelbourneWorld's largest mining company measured by 2011 revenuesRevenue: USD 72.226 billion (2012)On 8 November 2007, BHP Billiton announced it was seeking to purchase rival mining group Rio Tinto Group in an all-share deal

A British-Australian multinational metals and mining corporation with headquarters in LondonPlaced itself among the world leaders in the production of many commoditiesRevenue: USD 50.967 billion (2012)Rio Tinto rejected the initial two bids made by BHP Billiton on the grounds of being “significantly undervalued”

*About the Transaction

*The joint operation (Australia's biggest merger at that time) valued the business at $116bn (£72.9bn)

*It was expected to save the firms $10bn through sharing costs

* The shares of both companies rose after the announcement of the deal, with Rio closing up 4.96% at £34.90, and BHP 4.72% higher at £20.31½

*Combined, BHP and Rio would have had access to more than 350m tonnes of ore, making them the world's largest mining group

*The Synergies Involved

*The estimated annual synergies (mining and distribution) operations of the firms: USD 10 billion

*Combining BHP’s mining capacity with Rio’s distribution architecture

*Combining adjacent mines into single operations

*Reducing costs through shorter rail hauls and more efficient allocations of port capacity

*Blending opportunities, which will maximize product recovery and provide further operating efficiencies

*Optimizing future growth opportunities through the development of consolidated, larger and more capital efficient expansion projects

*Combining the management, procurement and general overhead activities into a single entity

*Argument by Parties

*JV would be limited to the production

level and operate as a cost centre

*Marketing arms would remain separate

and request output from the

production JV independently

*Competitive Effects under the Proposed Structure

*Risk that the production JV has the ability and incentive to restrict supply even if it acts independently from the marketing arms

*Risk that BHPB and RT could influence production decisions through non-executive Owners’ Council

*Risk of coordination between marketing arms due to increased transparency

*What went Wrong? Oh-Ohh!* China, the largest consumer: Concentration of the Pricing Power

* The Regulators: Antitrust Violations

* Reasons for their Opposition

* Instead of three miners controlling 75% of the market there will be a duopoly controlling the market

* Withholding Strategy: Production may be cut substantially in order to limit the decline in iron ore prices

* Thus, steel mills around the world would be exposed to potential price increases, increasing their costs and reducing margins, and higher costs for end customers (estimated 25% increase in costs for China)

* The JV would become the largest supplier of iron ore lumps and fines and raise competition concerns

* Post JV, the competition between HP Billiton and Rio Tinto would reduce with respect to volumes, price and quality (in spite of separate marketing functions)

* Post JV tacit collusion possible with the JV and smaller players

* Increased entry barriers for potential and existing suppliers

* End Result: The deal DID NOT go through!

*Were there any “remedies” possible?

*Some regulators said that they would re-consider the JV bid if certain “remedies” or divestitures were made to alleviate concerns

*None of the “remedies” were feasible for both firms

*Possible remedies included:-

*The participants should have continued to compete through separate independent operations or through participation in other collaborative efforts

*Reduction in the financial interests of the participating firms (through the JV)

*Each participant’s ability to control should be limited

*Effective safeguards in place to prevent information sharing

*Reduction in the duration of the collaborative effort

The Organization of the Petroleum Exporting

Countries (OPEC)*Association of Countries rather then companies - An

intergovernmental cartel?

*Controls policy matters regarding the oil extraction in member countries

*Was formed to reduce dependence of the member countries on the multinational companies controlling prices vis-à-vis economies of the countries

*Membership increased from 5 to 14 in the last 53 years

*OPEC- A Cartel or a Trade Association

*Formed to control government policies, in the favour of long term interest of member sovereign countries and their residents

*Mission was to stabilize price movements, not to control it

*Have seen a price dip due to excess supply or lower then expected demand in last few year

*Controls only 40% of current oil production, despite having 70% of total reserve

* Controls extraction and supply of oil from member countries rather then directly controlling international oil prices

*Failure of the Antitrust regulators against the OPEC

*Sovereign matter of countries, governments have the right to make decision regarding natural resources

*Strong defence under the case laws from WTO/GATT

* Identification of petroleum as a exhaustible natural resource

* Article xx (g) defines that production can be restricted for exhaustible natural resources in case purpose of such restriction is the conservation of resource

*Difficult to ascertain the OPEC’s identity as Cartel or as an Association

*Political considerations, keeping in mind that OPEC countries still have 70% of total oil reserves