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SYDNEY (AFP) — The world's biggest miner BHP Billiton announced Tuesday it was dropping its controversial hostile takeover bid for rival Rio Tinto due to the state of the global economy.
The massive offer, which would have created a global mining behemoth, had raised concerns from steelmakers that the new company would have too much control over commodity prices.
Rio Tinto repeatedly rejected the offer as too low before the financial crisis had fully kicked in, and BHP chief executive Marius Kloppers said Tuesday that it was now off the table.
"The greater debt exposure of the combination plus the difficulty of divesting assets have increased the risks to shareholder value to an unacceptable level," he said in a statement.
Chairman Don Argus said the Anglo-Australian company was concerned about the "deterioration of near-term economic conditions" but insisted that the tie-up still made sense.
"We have not changed our view of the basic industrial logic of the combination, or of the longer term prospects for natural resource demand growth driven by emerging economies," he said in a statement.
BHP Billiton increased its to offer to 3.4 of its own shares for every Rio Tinto share in February, effectively valuing Rio, the world's third-biggest miner, at 147.4 billion dollars at the time the offer was made.
It had initially offered 3 for 1.
BHP's decision to retract the offer comes as the bid, which had already passed Australian and US competition regulators, was awaiting a ruling from the European Union's antitrust regulator.
Rio Tinto had repeatedly rejected the bid, saying it vastly undervalued the Anglo-Australian group, whose major products include <link http: www.foundry-planet.com _top external-link-new-window>aluminium, <link http: www.foundry-planet.com _top external-link-new-window>copper, diamonds, gold and <link http: www.foundry-planet.com _top external-link-new-window>iron ore.
But the world economic crisis has also been felt in the global mining industry.
A slowdown in demand from China has already seen miners cut back on the production of iron ore, a vital ingredient in steel-making, around the world.
Earlier this month Rio Tinto slashed output at its western Australian plants by 10 percent to bring production in line with revised customer requirements.
And over the weekend BHP said it would reduce iron ore pellet production at the Samarco iron ore interest in Brazil, in which it owns a 50 percent stake, due to weak demand.
The world's largest producer of iron ore, Brazil's Vale, has also slashed output by up to 10 percent to adjust to shrinking demand caused by the global financial crisis.
Analysts had predicted that this year's negotiations for contract prices for iron ore would see an end to the stratospheric rises in prices won over the past six years amid booming growth in China and other developing nations.
BHP Billiton, which will book a 450 million dollar (289 million US) cost over its progress towards the takeover bid, said it had however approved a 4.8 billion US dollar investment to expand its iron ore operations in Western Australia by 50 million tonnes to 205 million tonnes per annum.
"While there is substantial uncertainty in the short term outlook, this investment decision highlights BHP Billiton's confidence that the long term outlook remains positive," BHP Billiton chief executive of ferrous and coal Marcus Randolph said in a statement.
Analysts welcomed BHP's decision to walk away from the bid, which came after the close of the Australian stock market Tuesday, as sensible given the financial turmoil which has rocked equity markets and commodity prices.
"I think it is a wise strategy," Fat Prophets analyst Gavin Wendt told national news agency AAP.
"It was always going to be a high risk bid with lots of potential stumbling blocks and the biggest one, aside from having to get European Commission approval, is that we're currently in one of the most uncertain financial times that has been witnessed in 80 years or more."
DJ Carmichael analyst James Wilson said the likelihood that BHP Billiton may have had to divest certain assets to satisfy the European regulators, combined with debt concerns and the current uncertainty, had killed the proposal.
"I think it is great for BHP, I think it shows a sign of maturity that they're willing to cut their losses and get out of there before it costs too much," Wilson said