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04. September 2008

BHP's Pursuit of Rio Tinto Hits a Regulatory Setback

BHP Billiton's effort to pull off what would be one of the biggest takeovers ever -- a $130 billion purchase of rival mining giant Rio Tinto PLC -- stalled on Tuesday when European regulators suspended their antitrust review of the bid.

The move by the European Commission, which said it acted because of a lack of information from BHP, casts further doubt on whether the proposed acquisition will pass muster with the European Union's executive arm, considered the biggest regulatory hurdle to the takeover effort.

The suspension pushes back a Dec. 9 deadline for the EU to rule on the bid and could undermine BHP's goal of securing approval from regulators in Europe, South Africa and Australia by the end of this year.

Tuesday's regulatory setback is the latest twist in a saga that began in November, when BHP launched a bid it later raised to 3.4 of its own shares for each share of Rio Tinto. London-based Rio Tinto rejected both offers as too low.

As recently as April, its shares traded at a premium to the bid price, on hopes BHP would boost its offer to win a recommendation from Rio Tinto's board. Since then, however, Rio Tinto's share price has fallen well below the value of BHP's offer.

BHP, based in Melbourne, Australia, plans to take its offer directly to Rio Tinto shareholders, assuming it wins regulatory approvals for its bid. To succeed, it would need acceptances from a majority of Rio Tinto's shares.

On Tuesday, Rio Tinto's shares finished London trading at 4,830 pence ($88.04), giving the company a market value roughly 13% below BHP's offer price. That gap suggests investors are becoming increasingly nervous that a deal won't happen.

It wasn't immediately clear how long the EU's suspension would last, or how far it would push back the bloc's decision-making deadline. The clock was stopped after EU antitrust regulators requested data from BHP that the company couldn't quickly provide, according to a person close to BHP. This person said the data were "taking some time to extract from the system" but wouldn't be more specific.

A BHP spokesman said such suspensions are a "normal" part of EU antitrust investigations.

BHP remains confident it will meet its year-end goal for regulatory approvals, a person close to the company said. A spokesman for the commission wouldn't elaborate on the suspension.

U.S. regulators have already granted preliminary approval to the bid. Australian regulators have asked BHP for more information and delayed their decision to sign off on it.

In July, the EU started an in-depth review of the proposed acquisition. It is likely to be contentious, given substantial concerns in Europe about the dwindling number of suppliers of seaborne iron ore, a key source of raw material for European steelmakers. In past years, the EU has ordered companies to sell certain parts of their businesses before clearing mining deals. BHP has said it shouldn't have to make any such divestitures.

"Today's development is likely reflective of the difficulty in securing approval from multiple jurisdictions in a timely manner without the cooperation of Rio," London-based brokerage firm Liberum Capital said Tuesday in a research note.

A person familiar with the matter said there are no talks between the companies aimed at reaching a friendly deal.

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