Rio's doubts over BHP tie-up

A PLANNED iron ore joint venture with rival BHP Billiton is looking less attractive for Rio Tinto as prices of the commodity rise, and some hope the competition regulators will scuttle the deal, industry sources say.

The comments come as the Australia Competition & Consumer Commission yesterday indicated it would take a tougher view towards the joint venture than it did on BHP's proposed takeover of Rio in 2008, highlighting concerns that the two miners together might try to withhold supply of iron ore in order to boost prices.

Publicly, Rio remains committed to the deal, which the two miners say will deliver $US10 billion ($11bn) in synergies. One mining executive who did not want to be named said Rio chief executive Tom Albanese could not afford to admit another misstep.

His tenure has featured the purchase of an over-priced Alcan, the rejection of a takeover by BHP and a failed attempt at an unpopular $US19.5bn bailout by Chinalco.

Industry players say some within Rio have deep doubts about the joint venture, which was unveiled in June last year, and would not be concerned if regulators blocked it.

With spot iron ore prices more than double last year's benchmark, analysts say the $US5.8bn "equalisation payment" that BHP would make to Rio as part of the deal and in recognition of Rio's larger West Australian iron ore business is now looking cheap.

"There are noises coming from within the company and there is a view in the market that they should re-examine it," said one analyst who did not want to be named.

With many major investment houses advising on the deal, analysts are loathe to be quoted, but most agree the improvement in the iron ore pricing environment makes the deal look very favourable for BHP and that some inside Rio are having second thoughts.

"There is a belief within Rio Tinto that they have the best iron ore operations in the world and that the deal does not reflect the quality of the assets nor the resource base, and I would have to agree with that," an analyst said.

One industry participant said the deal was struck when Rio was still grappling with the $US38.7bn of debt it incurred in the takeover of Alcan, but the company had now righted itself thanks to the recovery in prices, asset sales and its $US15.2bn rights issue.

A spokesman for Rio said the company remained "very committed" to the joint venture, which was a "win-win" for both miners.

BHP declined to comment on the impact that iron ore prices might be having on the attractiveness of the equalisation payment, though it pointed to the deal, which mentions some flexibility to adjust the size of the payment based on cashflows between July 1, 2009 and the closure of the deal.

Few expect Rio to have the stomach for walking away from the deal after the tumult of the past 18 months, especially given the $US275.5 million break fee it would incur.

The biggest barrier to the deal is approval by the European Commission, which is being lobbied hard by steelmakers worried about higher prices.

"Rio will not be disappointed if the European authorities don't allow the deal to proceed," a third analyst said. The European Commission has not said when it will give its decision, but the ACCC is due to rule by April 18 and is widely expected to pass the deal, as it had earlier approved a proposed full BHP bid for Rio.

As well as regulatory approval, the deal is conditional on shareholder approval by holders of Rio's London-listed stock, which is not seen as a given.

"Non-Australian shareholders in Rio Tinto will definitely be looking at this on a standalone basis and wondering if it is good for them," one analyst said.