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Biggest M&A dead end in history, between Rio Tinto and BHP Billiton
October, 25th 2010

The collapse of the joint venture between mining groups Rio Tinto and BHP Billiton last week represented the final nail in the coffin of a saga that began almost three years ago, led to three failed deals, involved 18 investment banks and 17 law firms, and lost bankers more than $350m in success fees. Taken collectively, it marks the biggest failed corporate courtship in history.

For an army of execution bankers, metals and mining industry specialists, corporate and competition lawyers and accountants, it was the culmination of 35 months of work that came to nothing.

The bankers are the biggest casualties. They have lost potential success fees of $355m, according to research by Financial News, estimates from consultant Freeman & Co and published company documents.

Exact arrangements vary from deal to deal and adviser to adviser, but a straw poll of M&A bankers places the success element of the fee package at anywhere between 70% and 90% of the total. The balance is accounted for by a monthly retainer and additional fees paid out at milestone events for example on publication of the formal offer document.

On the failed joint venture, Freeman & Co estimates the six banks advising on the deal would have shared $172m if the deal had gone ahead, split fairly equally between them. That means anywhere between $120m and $155m was not paid out to Goldman Sachs, Lazard and Gresham Partners as advisers to BHP Billiton, and Morgan Stanley, Credit Suisse and Macquarie as advisers to Rio Tinto.

The collapse came two years after BHP Billitons hostile attempt to acquire Rio Tinto for $149bn was aborted, which resulted in a further $120m in lost fees for BHP Billitons eight advisers, according to Freeman & Co estimates.

One co-head of mergers and acquisitions at a European investment bank, said: This is the painful reality of our business. Fees in M&A are overwhelmingly success-based. You can spend months even years working on a transaction and it comes to nothing. You just have to dust yourself off and get on with the next one.
The saga began on November 8, 2007, when BHP Billiton chief executive Marius Kloppers announced his intention to acquire rival Rio Tinto in a cash and shares deal worth $149bn. Rio Tinto refused to engage and BHP Billiton formally launched a hostile bid the following February.

According to data provider Dealogic, BHP Billitons failed bid for Rio Tinto is the largest failed deal on record worldwide. The joint venture, which unravelled last week, is the ninth largest at $58bn. Based on the share prices of Rio and BHP three years ago, the takeover for Rio was the third largest announced on record, topped only by Vodafones acquisition of Mannesman for $183bn in 2000 and AOLs $165bn merger with Time Warner the same year.

Just over a year after BHP made its move, that deal collapsed in the face of the impending financial crisis and mounting opposition from the European Commission and regulators in Korea, China and Japan. According to its 2009 annual report, Rio Tinto paid around $42m to its advisers for successfully defending against BHP Billitons hostile approach, which was shared between eight banks and three law firms.

BHP Billiton paid $450m in fees, according to its 2010 annual report, comprising $294m to investment banks, lawyers and accountants for advice, and $156m relating to an 18-month $55bn debt facility taken out to finance the deal. However, a further $120m was left on the table in unpaid success fees, according to Freeman & Co estimates.

In February last year, to protect itself from future hostile bids and help tackle its rising debt pile, Rio Tinto agreed to sell an 18% stake to Chinese state-owned metals conglomerate Chinalco for $19.5bn. The tie-up never materialised and Rio Tinto was forced to pay a break-fee of $195m.

Chinalcos adviser Blackstone is likely to have received a chunk of this break-fee and was therefore one of the few financial advisers to benefit. Freeman & Co estimates Rio Tintos advisers were paid $6.8m, compared with $50m to 80m if the deal had gone through.

Instead of going with the Chinese, Rio Tinto agreed to a $58bn iron ore joint venture in Western Australia with BHP Billiton. This time the deal was friendly, and had been deliberately structured to satisfy the objections raised by the European Commission during the hostile bid.

Yet last week some 17 months later it also unravelled. BHP Billiton and Rio Tinto had failed to convince global regulators that a tie-up would not have a damaging effect on the prices of iron ore, coal, uranium and aluminium.

While the bankers lost the success element of their fees on both deals, the law firms were still rewarded because they are paid by the hour regardless of outcome. This is ironic, because it was their failure to get anti-trust approval that derailed both the proposed merger and the joint venture.

A Rio Tinto spokesman said: The regulatory outcome reflects how the market and political backdrop have changed since we agreed to the deal in June 2009. The supply/demand balance has caused prices to increase more than 100% since June 2009, prices have been volatile for 2010, and quarterly pricing has been introduced.

While that has nothing to do with the degree of competition in the market, and nothing to do with the proposed JV, it is the backdrop against which customers and industry associations voiced concerns about the JV. This created a more politicised environment, making it more difficult to get clearance for the joint venture.

BHP Billiton has now made a $40bn hostile bid for Canadian fertiliser group Potash Corporation.

After advising BHP Billiton on the both failed deals with Rio Tinto, Goldman Sachs has switched sides and is now advising Potash Corporation. If it helps Potash fend off its former client it may finally see a success fee. For many of the other banks, the opportunity has passed.

BHP Billiton in numbers

1,078 - Days since BHP Billiton first proposed tie-up with Rio Tinto

3 - Number of failed deals

$227bn - Combined value of the failed deals

18 - No of banks on the deals (17 law firms had a role)

$450m - Fees paid by BHP Billiton to advisers

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