Germany, EU unhappy with BHP-Rio iron ore joint venture

Eric Onstad and Foo Yun Chee

LONDON/BRUSSELS (BestGrowthStock) – A planned iron ore joint venture between BHP Billiton and Rio Tinto looked set to be opposed by European regulators after Germany said it would ban the $116 billion deal.

The statement from the German Federal Cartel Office (FCO) said it would prohibit the planned merger of the Western Australian operations of the world’s second and third biggest miners of the raw material for steel.

EU regulators, deemed as the biggest hurdle to approval of the venture, are set to say the merger could hurt competition, a source familiar with the case said.

“The Commission is now expected to issue a statement of objections to the companies,” said the source, referring to the European Union executive’s charge sheet.

Analysts said the comment was another nail in the coffin for the deal though it was in line with a statement last week by Rio that the merger had run into obstacles from regulators.

“What is quite clear is that it is almost inconceivable that the German cartel office, the most significant industrial nation in Europe, could block the deal and yet it would still be approved by the EU,” said analyst Dominic O’Kane at Liberum Capital in London.

“I would expect a series of terminal decisions for the deal.”

RIO, BHP STILL HOPEFUL

Rio and BHP said they had not lost hope for pushing through the deal, which they had hoped would result in $10 billion dollars in cost savings by combining infrastructure in Australia’s Pilbara region.

“The parties continue to believe that the joint venture is pro-competitive and will increase the supply of iron ore,” the miners said in a joint statement.

The German regulatory process is continuing and a formal notification was expected to be received by the miners next week. “No decisions about next steps have been taken at this stage while regulatory discussions continue,” the miners said.

Regulators in Australia, Japan and other markets are also reviewing the deal, but analysts see the Commission as the biggest hurdle due to tough opposition from EU steel producers.

EU antitrust regulators are due to meet with Rio and BHP by the end of this month to discuss the venture.

The news about German and EU regulators came as Rio said it churned out a record amount of iron ore in the third quarter.

Last week an Australian newspaper quoted Rio’s chairman saying the group was determined to walk away from the deal, which has been unpopular with Rio’s shareholders. Rio said that no decision had been made.

The venture was announced last year when Rio was heavily in debt and iron ore prices were less than half today’s level. Under the deal, Rio would hand over 5 percent of its Australian iron ore operations to BHP for $5.8 billion, which many Rio Tinto investors now view as too cheap.

In theory, BHP and Rio could offer to sell off some of their iron ore operations to gain approval from regulators, but O’Kane said this would not sit well with Rio shareholders.

“I don’t see it (divestments) being a commercially viable solution for Rio Tinto after the headwinds from their shareholders when the deal was announced.”

(Additional reporting by Julie Crust in London and Frankfurt newsroom; Editing by Paul Sandle and David Holmes)

Germany, EU unhappy with BHP-Rio iron ore joint venture