Rio Tinto Falls After BHP Said to Face EU Objections to Offer

By Matthew Newman and Brett Foley

Oct. 23 (Bloomberg) -- Rio Tinto Group, the world's second- largest iron ore exporter, fell in London trading after European Union regulators told lawyers for BHP Billiton Ltd. its $69 billion hostile bid for Rio may break antitrust rules.

The European Commission, the 27-nation European Union's antitrust regulator in Brussels, will likely issue the companies a so-called statement of objections, two people close to the case said. The objections will outline the commission's concerns that the combined company's share of the iron ore market may lead to price increases, said the people, who declined to be identified because the regulator's proceedings aren't public.

The decision may pressure BHP to sell assets and prove to regulators by Jan. 15 that the world's biggest mining merger won't restrain competition. London-based Rio has traded at a discount of as much as 29 percent to the value of BHP's offer, indicating the deal may fail.

Rio fell 175 pence, or 7.3 percent, to 2,214 pence as of 9:45 a.m. on the London Stock Exchange, or 25 percent below the value of BHP's offer. BHP slipped 5.1 percent to 835 pence. Rio plunged in Sydney trading, losing 15 percent to close at A$66.95. BHP slumped 9 percent, wiping a combined value of A$13.8 billion ($9.2 billion) from the companies.

``The EU is definitely the highest hurdle for BHP and the commission will seek to protect European steel mills,'' Damien Hackett, an analyst at Canaccord Adams Ltd. in London, said by telephone. ``BHP will end up with a list of asset divestments that they will find unpalatable.''

Metals Slide

Commodity prices dropped to the lowest levels in four years yesterday, paced by declines in oil and copper, dragging the 162- company Bloomberg World Mining Index down 9.3 percent. Prices for metals including copper and nickel continued their slide today.

Other mining shares also fell in London. Antofagasta Plc dropped 10 percent to 258.75 pence, Lonmin Plc declined 6.9 percent to 1,148 pence and Kazakhmys Plc slipped 6.6 percent to 240.75 pence.

BHP, based in Melbourne, may have to sell iron ore or coal assets to get approval for the offer, ING Bank NV analyst Nick Hatch said last month. Global financial turmoil has scuppered other transactions, including Xstrata Plc's proposed 5 billion pound ($8.2 billion) bid for platinum miner Lonmin.

``The financial crisis and governments having to rescue banks recently will give regulators a more negative view,'' Hackett said. ``The chances of BHP succeeding are deteriorating with the crisis, not getting better.''

Right to Reply

Illtud Harri, a BHP spokesman in London, said the company will cooperate with the commission directly and won't comment on the process. Rio spokeswoman Christina Mills and Jonathan Todd, a commission spokesman, both declined to comment.

The commission's statement of objections, which is a confidential document, will be sent as late as the first week of November, one person said.

BHP has the right to respond to the concerns and can ask for a hearing. Steelmakers, consumer groups and EU government representatives could attend the hearing and would have access to an edited version of the objections that has been stripped of confidential data.

The commission could use the objections as a basis to block the deal. Companies often overcome the concerns through talks with the commission on remedies to remove antitrust problems. In some cases, the regulator approves takeovers after sending objections and doesn't demand divestments or changes to the deal.

Cleared Transaction

Earlier this year, the commission cleared TomTom NV's 2.9 billion-euro ($3.7 billion) acquisition of Tele Atlas NV without any changes to the terms of the deal after sending the companies a statement of objections in February. Australia raised concerns and then cleared BHP's bid without asking for divestments.

The commission stepped up its investigation in July after an initial five-week review, saying that it had ``serious doubts'' about a combination that would control more than a third of the world's iron ore exports. BHP, already the world's biggest mining company, would also become the largest producer of copper, aluminum, and coal burned by power plants.

The commission restarted its review on Sept. 29 and will rule on the deal by Jan. 15. The Australian Competition and Consumer Commission and the U.S. Department of Justice have approved the deal without seeking asset sales, while a decision is still pending in South Africa.

Rio rejected BHP's sweetened, all-share offer on Feb. 6, saying it undervalued the company and its growth prospects. BHP Chief Executive Officer Marius Kloppers, who's borrowing a record $55 billion to pay for the deal, in February increased his offer to 3.4 shares for every one of Rio's, from a 3-for-1 proposal in November.

Vying With Vale

Asian and European steelmakers oppose the transaction, saying it would give BHP too much influence over iron ore prices. The combined companies would vie with Brazil's Cia. Vale do Rio Doce as the world's largest supplier of the raw material used to make steel.

The commission's probe has focused on iron ore pricing, the people said. The EU regulator is concerned that prices would effectively be set by the combined company because of its large sales to China. The EU regulator is also worried about the impact on prices for coking coal, they said.

``The recent iron-ore contract price negotiations illustrates what happens when big companies get together,'' Hackett said. BHP and Rio secured contract price increases of as much as 97 percent this year from steelmakers in China, the largest consumer.

The commission isn't likely to ask for asset sales in other areas, such as uranium, the people said.

To contact the reporters on this story: Matthew Newman in Brussels at Mnewman6@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net