Oil, mining M&A: Beware the politics

By Quentin Webb and Simon Meads

LONDON (Reuters) – Big mining and oil firms and their advisers need to become more shrewd to get deals through an increasingly tough political landscape, senior bankers say.

BHP Billiton (BLT.L: Quote, Profile, Research) (BHP.AX: Quote, Profile, Research), the world’s biggest miner, has ditched three major deals in as many years, including its $39 billion bid for top global fertilizer maker Potash Corp (POT.TO: Quote, Profile, Research), in the face of resistance from politicians, competition watchdogs, and others.

The unexpected blocking of BHP-Potash by Canada’s government was a “pretty brutal lesson,” said Mark Echlin, head of industrials at Credit Suisse, at the Reuters Global Mergers and Acquisitions (M&A) Summit on Tuesday.

It showed companies and their advisers they needed to become “a lot smarter on the politics” of deals, and how they would “play on the Street,” he said.

“I’m certainly not saying there are no mega-deals left,” Echlin said, but he added: “I do think they have become more challenging because of the regulatory issues.” In mining they faced “formidable” antitrust problems.

Nigel Robinson, head of natural resources M&A at Deutsche Bank, said: “People often mistake regulation for being a legal process — it’s actually a political process.

“The larger the deal the more political it becomes,” he told the summit, held at Reuters London offices.

One shift in dealmaking could see major natural resources firms increasingly working with so-called “national oil companies” (NOCs) and other state-backed firms mounting joint bids for assets, projects, or even entire companies.

Recent examples include PetroChina and Royal Dutch Shell’s (RDSa.L: Quote, Profile, Research) joint bid for Australia’s Arrow Energy last year and BP’s (BP.L: Quote, Profile, Research) disputed tie-up with Russia’s Rosneft (ROSN.MM: Quote, Profile, Research).

Despite BP’s problems, “that kind of partnership between access to resources, local NOC and major, is something that we see much more of happening,” said Julian Mylchreest, global co-head of energy and power at Bank of America Merrill Lynch.

The partnerships can help smooth political problems and allow an emerging market bidder to tap the expertise of a Western operator, Deutsche Bank’s Robinson said.

For the Western partner, working with a deep-pocketed state firm can remove the risk of an “interloper” disrupting the deal. Such tie-ups are also appearing in mining: last year Rio Tinto partnered with Aluminum Corp of China, known as Chinalco, to work in Guinea.

But even here, Rio is fighting to keep the company’s rights to part of the giant Simandou iron-ore project. Last month Chief Executive Tom Albanese said the “curse of resource nationalism” was a major obstacle to mining projects worldwide.

Industries centered on natural resources are the world’s busiest for dealmaking in the last year, Thomson Reuters M&A data show.

The three busiest industries are oil and gas, metals and mining, and power, with a combined $700 billion of deals accounting for 26 percent of global M&A.

(Editing by Louise Heavens and Elaine Hardcastle)

Oil, mining M&A: Beware the politics