bhp billiton and rio tinto jv – blocked by regulators
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*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