BHP's Failed Deals Won't Stop Kloppers' Pursuit of M&A

BHP Billiton Ltd. Chief Executive Officer Marius Kloppers won’t let three failed investments worth more than $100 billion prevent further takeover attempts. Finding big, buyable targets will be the difficulty.

BHP, the world’s largest mining company, scrapped a $40 billion hostile cash bid for Potash Corp. of Saskatchewan Inc. yesterday after the transaction was rejected by Canada. Kloppers’ two other failed deals -- a bid for Rio Tinto Group and an iron ore venture with that company -- were abandoned following competition concerns from regulators.

“With the size of BHP, he has to go and do things that are fairly audacious, which are always going to have a fair amount of regulatory risk,” said Shaun Manuell, head of asset management at Melbourne-based Equity Trustees Ltd., which manages the equivalent of $1 billion including BHP shares. “There is not a lot there that fits within their demographic of large, low-cost mines.”

Kloppers may decide to pursue energy acquisitions, with UBS AG singling out Anadarko Petroleum Ltd., Woodside Petroleum Ltd. and closely held U.S.-based coal producer Drummond Co. as possible targets. Some shareholders are yet to be won over to a takeover strategy, with 64 percent of respondents to a Bloomberg News survey in September saying BHP should invest in its own mines, make buybacks or pay dividends ahead of acquisitions.

BHP’s Australian shares have underperformed since the Potash Corp. offer was announced on Aug. 17, rising 10 percent, less than Rio’s 23 percent and Xstrata Plc’s 36 percent gain. BHP’s Sydney-traded shares rose 0.8 percent to A$44.51 at 10:33 a.m. local time.

Takeover Cash

BHP, which held $12.5 billion of cash on June 30, is considering takeovers in the energy industry, J. Michael Yeager, CEO of the company’s oil and gas division, said in September.

The company’s petroleum unit is its third largest by sales, accounting for 17 percent of revenue in the last financial year. Iron ore and base metals are the biggest earners.

“The favored sectors will be iron ore, coking coal, copper and oil,” said Peter Chilton, who helps manage the equivalent of $790 million at Constellation Capital Management Ltd., including BHP shares. “I’m sure they will do smaller acquisitions. There are not that many tier-one assets around, which is why BHP went for Potash,” the world’s biggest producer of the crop nutrient, he said by phone from Sydney.

The Melbourne-based company has the potential to earn more than $40 billion a year in earnings before interest, tax, depreciation and amortization from next year, Sanford C. Bernstein Ltd. said last month.

BHP Meeting

Kloppers, 48, will address shareholders today in Perth at the company’s annual meeting after spending at least $800 million on costs related to the three abandoned deals since his appointment as CEO in May 2007. He resumed BHP’s share buyback yesterday and Goldman Sachs & Partners Australia Pty expects the company to raise its first-half dividend and consider “on-and- off-market” buybacks for its Australian-traded stock.

He spent $450 million on the bid for Rio in 2008 and $350 million on the Potash Corp. offer, according to the company. The failed bid to set up the iron ore joint venture with Rio cost $75 million, according to the Australian Financial Review.

“The potential for a large, debt-funded acquisition remains, but is not unduly threatening to BHP’s credit,” Michael Bush, an analyst at National Australia Bank Ltd., said in a note yesterday. “Oil and gas opportunities are likely, with attention currently centering on Woodside Petroleum, though for BHP, earnings-per-share accretive deals in this sector may be harder to identify than those within the mining industry.”

Acquisition Options

Market-share concerns constrain BHP’s acquisition options in iron ore and coking coal, while industry fundamentals would rule out aluminum and nickel, leaving oil and copper, Citigroup Inc. said this month.

“World-class M&A” opportunities are limited in copper, and an oil acquisition risks skewing BHP’s production portfolio toward energy, Citigroup said.

BHP, the world’s largest coal exporter and third-largest iron-ore shipper, can trace its roots to the Australian outback town of Broken Hill where it began mining base metals in 1885.

The company now has operations in Australia, Africa, South America, North America and Europe. It has sales of $1.52 million for every 1,000 employees, compared with Xstrata, which has $768,000, according to data compiled by Bloomberg. Rio has sales of $525,000 for every 1,000 employees.

Reassess Strategy

“BHP probably need to reassess their M&A strategy,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne, including BHP shares. “The regulatory environment is proving more difficult than they originally assessed and that may be due to the sheer size of the deals that they’re proposing.”

BHP’s London-traded shares have advanced 174 percent over the past two years, compared with a 114 percent gain for Rio. BHP is trading at a forward price-to-earnings ratio of 12.06 times, while Rio is trading at 12.4 times.

“He still has a future with BHP,” said Constellation’s Chilton. “He attempted the almost undoable, because he was up against regulators. You need somebody who has some drive and he has.”