CHAPTER 28
Investors had little doubt that Marius Kloppers would be more aggressive than his predecessor on the mergers-and-acquisitions front – BHP Billiton had made no big purchase since taking over WMC Resources in 2005, a deal in which he had been intimately involved. But no one outside the company anticipated just how quickly he would act. In less than six weeks, he launched an offensive that, if successful, would reshape the global-mining industry. On Thursday, 8 November 2007, he announced a massive bid for arch-rival Rio Tinto in a deal that would create a mining company worth US$350 billion in market capitalisation at that time. 1
Kloppers’ strategists had been laying the groundwork for several months before he took over from Chip Goodyear on 1 October, and the new chief executive fired off a merger proposal – over the signature of Don Argus – to Rio’s chairman, Paul Skinner, who was visiting Sydney from his London base. As early as September 2006, Argus had an informal chat with Skinner about a negotiated combination, but that approach went nowhere.
Argus’s letter set out what BHP Billiton believed to be ‘a compelling and unique case’ for a merger between the two titans, one that would deliver US$3.7 billion in annual cost-saving synergies. Most would come from the iron-ore operation in the Pilbara by combining Rio’s Hamersley Iron with BHP Billiton’s seven mining operations, including Mt Whaleback, the biggest single-pit, open-cut mine in the world. Both companies were planning to double production. Once combined, they could share rail and port facilities at Port Hedland and Dampier. 2
But whether Rio Tinto’s tough new American chief executive, Tom Albanese, would be tempted depended on how much of a short-term premium BHP Billiton was prepared to pay for Rio’s proud independent heritage. That heritage ran deep. In one of the more extraordinary coincidences in the global-mining narrative, Rio Tinto could trace its beginnings back through Conzinc and CRA all the way to the Zinc Corporation, which mined its first paydirt at Broken Hill in the same ancient line of lode that gave BHP its start.
Albanese, fresh from a US$38.7 billion cash deal to acquire Alcan, immediately rejected BHP Billiton’s offer of three shares for every one Rio share. Market analysts had a field day. Rivers of ink were expended, with a general consensus that while Kloppers would need to raise the bid before he could wrap it up, the international implications were epochal.
Analyst Ian Verrender said, ‘This is not just another merger – this is a huge battle for control of vital and scarce resources, the sort of thing that has brought countries to war in the past, and it has coincided with an uprising of Chinese nationalism.’ 3 Chinese Government spokesmen feared that the new mining behemoth would have the power to dictate prices to China’s steel mills and power stations. The president of Chinalco (the state-owned Aluminium Corporation of China), Xiao Yaqing, said, ‘A firm that owns too many resources is not good for the world. People do not want to see a company dominate the market in any industry.’ 4
More pertinently, perhaps, steeply increased prices for iron ore and coal would mean that Chinese manufactures would become more expensive, exports would be endangered, the great renaissance imperilled. Verrender added, ‘Justified or not, the message from China was blunt: the West was jealous and fearful of China’s ascendancy to its rightful position in the global community after a century of humiliation and poverty, and ordinary Chinese had had enough.’
Kloppers was quick to reassure his fastest-growing consumers. In November 2007, he visited Chinese steel mills to tell them the takeover would mean ‘more iron and a more predictable pricing system’. ‘For the Chinese economy that is growing very rapidly, the assurance they will get product at the market price and get more of that product is a very valuable proposition,’ he said. 5 The Chinese kept their own counsel.
Word soon leaked that Marius Kloppers had dubbed his play ‘Project de Bello’ – to do battle and vanquish. He saw himself storming the City of London citadel and restoring Rio Tinto to the Australian fold. And he had no doubt that if anyone could pull it off, he was the man for the job. ‘I’ve probably integrated more companies than any other executive in the industry,’ he said. ‘What I see before me is a deal absolutely without parallel.’ 6
In the New Year, BHP Billiton signed up China’s biggest steelmaker, Baosteel, for an additional 94 million tonnes of iron ore from Western Australia, the first shipment scheduled for April. It was business as usual. But suddenly, on 30 January, in what was described as ‘the biggest-ever dawn raid’ on the London Stock Market, Chinalco joined with the US aluminium giant, Alcoa, to buy a nine per cent stake in Rio Tinto for US$14.05 billion. The consortium declared that it did not intend at that time to make a takeover bid for the company but reserved its right to do so later. Xiao Yaqing said in Sydney, ‘Our acquisition of a significant strategic stake in Rio Tinto today reflects our confidence in the long-term prospects for the rapidly evolving global-mining sector.’ 7
Rio Tinto chairman Paul Skinner said he did not believe Chinalco’s motives were ‘sinister’. On the contrary, he welcomed the emergence of a new player that would provide him with tactical leverage in the ensuing boardroom battle. Kloppers’ reaction was swift. In February, he decided to go hostile with his all-scrip offer. And he backed his judgment by raising the bid to 3.4 shares to one of Rio’s. Albanese and his board spurned that too.
To execute his battle plan, Kloppers detached the company’s suave chief commercial officer, 48-year-old, Yale-educated Alberto Calderon, to lead no fewer than 100 BHP Billiton personnel in the Rio offensive. The charismatic Colombian, who lived in London with his wife, Marta, and two children, was soon on the warpath, describing Tom Albanese’s claim to have increased the value of Alcan by US$30 billion as ‘voodoo economics’. 8
In April 2008, Calderon was joined by Nelson Silva, who had been running the aluminium division from company headquarters at Neathouse Place, Victoria. ‘Nelson is very instrumental in looking at the iron-ore piece of the deal,’ Kloppers said, ‘and particularly the interaction with the EU, since he’s had such an extensive history in the iron-ore business, having worked for CVRD [Vale] for many years.’ 9
Kloppers and his team were operating in a world of infinitely expanding markets for their major commodities and a stock-exchange bull-run powered by seemingly unstoppable Chinese growth. And when it began to slacken, India would come on line to drive resource companies along an endless path of rising prosperity. Their only concerns were the regulatory bodies, which seemed determined to guard against too great a market share falling to The Big Fella. And even there, the United States was making all the right signals and the Australian Consumer and Competition Commission (ACCC) under chairman Graeme Samuel could be expected to give the deal a tick. The European Union was another matter. On 4 July, the European Commission’s competition regulator opened an in-depth investigation into the deal after issuing a tough statement that listed sweeping anti-trust concerns.
The new entity would have at least 36 per cent of the world’s iron-ore market, and European steel mills would press their competition regulator to block the deal on anti-trust grounds. Japanese and Chinese mills were also likely to complain. Kloppers countered that while it would be a marriage of the second-and third-biggest iron-ore producers, it would still leave the world’s biggest, Brazil’s Vale, with a similar market share.
In his letter to Rio, Don Argus had been confident that regulators could be satisfied. Rio replied that it was sceptical about the chances of a mega-marriage clearing the regulatory hurdle. It also believed BHP Billiton was moving then because negotiations with Chinese and Japanese mills would result in commodity-price increases, and a big market re-rating for Rio, whose Pilbara mines were superior to BHP’s. 10
BHP Billiton’s other main iron-ore asset was Samarco, an equal joint venture in Brazil with the mine’s operator, Vale. The merger would mean that the company controlled close to 80 per cent of the world’s seaborne trade in iron ore. But Vale would still be the biggest producer, with 300 million tonnes of ore expected in 2008, compared with 275 million for BHP and Rio.
Kloppers’ new entity would have mines and oilfields in six continents, including an 87.5 per cent stake in Chile’s massive Escondida copper mine. It also would have assets in uranium, diamonds, silver, lead and nickel. Rio Tinto had become the world’s largest aluminium producer after acquiring Alcan, and a merger with BHP Billiton’s enormous aluminium assets would make it bigger than the highly competitive Russians. The Alcan deal had saddled Rio with about $40 billion in debt, but in an expanding world market that was easily manageable.
The Rio battle – with fronts in many global time zones – meant longer working hours for Marius Kloppers and an even more fractured home life. ‘I normally try to get a leisurely breakfast and a late start in the office – 10 am,’ he told the authors. After a full day’s work, he returned home ‘for some sort of a break from six to eight or seven to nine’ before the evening shift started with London coming into play. ‘That goes through until whatever time it takes.’ 11
He spent half his time outside Australia, often travelling with his assistant, a Scot named Gordon Carlisle, ‘one of the up-and-coming guys in the company, one of the young talents’. A South African and a Scot representing Australia’s largest company at the highest levels no longer raised eyebrows. The Big Fella’s cosmopolitan nature was now ingrained.
The Chinese, meanwhile, continued to defend their position in anticipation of Kloppers’ success. Their Sinosteel made a $1.2 billion bid for the West Australian iron-ore producer Midwest. Sinosteel already owned 40 per cent of the Channar mine, also in Western Australia. The bid was approved by the Australian FIRB. But Midwest directors recommended against acceptance and in March the bid turned hostile, the first of its kind by China in Australia.
With rumours flying of a Chinese counter-bid for BHP Billiton, Prime Minister Kevin Rudd’s political antennae were engaged and his treasurer Wayne Swan announced a ‘clarification’ of FIRB criteria in a press release. ‘The Australian Government welcomes foreign investment because it makes an important contribution to job creation and to our national economy more generally,’ he said. ‘Our job is to ensure that any given investment, regardless of its origin, is consistent with Australia’s national interest.’ Swan counselled a ‘cautious’ approach from Chinese investors. Bids would be examined ‘on a case by case basis’. The key criteria for Chinese state enterprises were the extent to which the foreign investor operated at arm’s length to the relevant government, and the extent to which the investment was driven by purely commercial objectives. But that still left substantial room for discretion.
Behind the political flummery, the Australian prime minister was acutely aware of two forces at play: first, public opinion, which still contained a measure of racial prejudice against the Chinese, having found its first expression in the riots against Chinese miners on the Victorian and NSW goldfields in the 1850s and ’60s and led to the notorious White Australia Policy at federation in 1901. Sixty years later, during the Vietnam War, it erupted again in the form of the political canard – ruthlessly propagated by the conservative parties – of ‘the downward thrust of Chinese communism’. Since then, it had simmered beneath the surface, erupting from time to time with the Beijing regime’s excesses, most notably in Tiananmen Square in 1989.
The second force was a behind-the-scenes lobbying assault by BHP Billiton to defend itself against the rumoured raid on its own share register by a state-backed Chinese corporation. Jennifer Hewett, national-affairs correspondent for The Australian, said, ‘BHP has been lobbying furiously in Canberra about the risks of allowing a Chinese company to block the prospect of a super resources company headquartered in Australia.’ 12
Don Argus was aggressively unrepentant. ‘You have a look what’s happening over in Africa, where the Chinese are actually going in taking Chinese people, trying to get countries, I suppose, to let them use their natural resources; they’re actually buying banks – they bought a full bank – so you need to be careful,’ he says. ‘You’ve got the Russians setting up their major resources companies. You’ve got Brazil – these are all state-owned and you need a countervailing force to be able to take these people on. And I’m saying this is one of the benefits that comes with the BHP Billiton/Rio merger, because you are in there competing.’ 13
Moreover, he remained unabashed about pressing his case at the highest levels. ‘I had a good working relationship with Bob Hawke,’ he says, ‘and Paul Keating – even though we disagreed on the four-pillars policy.
‘I had a good working relationship with John Howard, and I like to think I’ve got a good working relationship with Kevin Rudd. I’ve never been afraid to say what I think, and it doesn’t matter what side of politics is in. I’m very proactive in pushing Australia. I’m parochial when it comes to sport, and I’m very pragmatic about the way capital is used in an organisation, but I don’t apologise for being a passionate Australian; patriotic is probably the word I’d use.’
Not surprisingly, Rio’s Paul Skinner defended China’s right to invest in Australian resources. The Rudd government, he said, had taken a ‘very measured approach’ to its FIRB rules. ‘Japanese investment that was the key to developing Australia’s resources industry in the 1960s and ’70s also involved strong state direction,’ he said. 14 In the event, at least ten Chinese companies subsequently withdrew foreign-investment applications to buy into Australian resource companies after Rudd had made it plain that he wanted more time to prepare the ground politically.
Inevitably, the battle with Rio Tinto became personal. Kloppers told the Financial Times, ‘Tom Albanese has been comprehensively outperformed [by BHPB] in terms of volume growth, earnings per share growth, total return for shareholders and share-price performance.
‘On every metric I can envisage, [Rio] have been beaten. They have missed the boat on China; they are missing the boat on energy. It must be terrible [for them] that every quarter BHP outperforms, and that has been the case for seven years.’ 15
Asked what it would mean for him personally and for BHP Billiton if Project de Bello collapsed, Kloppers said, ‘If the deal did not happen – and it is a complex thing because there are many different angles – shareholders can take comfort in BHP having a great baseline strategy. We want to deploy $10 billion in capital on new projects and we have grown the company at eight per cent a year over the last seven years. We believe we are in a very sweet spot with our commodities mix.’ 16
That month – April 2008 – Don Argus was in China for an economic-development conference attended by Premier Wen Jiabao. ‘The commerce minister [Bo Xilai] singled out eight people that were obviously irritants to them and we were one of them because of iron-ore pricing,’ he said. ‘The new minister for finance [Xie Xuren] gave us all a little lecture about our positions and we were given one and a half minutes each to respond.’ 17
International Harvester, Michelin and Toyota were all chastised for one reason or another. When it was Argus’s turn, he gave vent to his feisty nature. ‘Look, you tolerate a hundred steel mills that aren’t efficient and that are setting the spot price,’ he snapped. ‘We’ll always meet the contractual arrangements, but we’ll have an eye on the spot price. And if you think you’re going to have a benchmark price down here while there’s a spot price up there, let me tell you, you will never get there. And not only that, iron ore is the only ore that you don’t have an index on, and we’re moving down that path, and we’ll continue to move down that path.’ 18
Don Argus grinned. ‘That was my one and a half minutes, and it didn’t take me one and a half minutes to get it out, either. And as we were going out the door, this guy [Xie Xuren], who did everything through interpreters, said in the most beautiful English, “Oh, Mr Argus, we must keep talking.” I said, “Very happy to talk about anything.” They appreciate your candour, they do. I don’t hold back. I don’t leave anything on the table that they don’t understand.’
The Rudd government’s first Budget, delivered by Swan on 13 May 2008, underlined the reason for the prime minister’s caution when it revealed the extraordinary effect the Chinese boom was having on the Australian economy. Swan announced a surplus of almost $22 billion – 1.8 per cent of GDP – provided overwhelmingly by rivers of Chinese gold that swelled the coffers of the Australian treasury. An even greater bonanza was in prospect – a 20 per cent increase in the terms of trade the following year – as BHP Billiton and other suppliers renegotiated the iron-ore price.
Marius Kloppers, however, said he saw China as only one element of the global strategy. ‘We’re in the extractive industries, and resources are viewed very much as an endowment of countries,’ he said. ‘We don’t view China as very geologically endowed. We sell about 20 per cent of our product there but we look at the global market first in its entirety. If I look at coking coal, for example, that would be driven primarily by Indian development, because China has got quite a lot of coal and India is quite short of energy products.’ 19
In June, Rio Tinto announced it had secured an 85 per cent increase in the price of iron ore to the biggest Chinese steelmakers. Within weeks, BHP Billiton had matched the Rio rise by reaching a new agreement with Baosteel to almost double the price of its iron ore to March 2009. Ian Ashby, Melbourne-born president of the iron-ore division, said, ‘Traditionally, prices only change once a year because the system was an annual negotiation. Things have changed slightly with the demand out of China because demand has outstripped supply.’ 20
On 8 July, Treasurer Swan revealed that the government would place limits on Chinese takeovers of Australian mining companies as it grappled with a $30 billion wave of Chinese foreign-investment proposals. Jennifer Hewett said that the move was likely to ‘aggravate tensions’ between the two countries. The Chinese ambassador to Australia, Zhang Junsai, told Hewett that Chinese firms were ‘puzzled’ by official delays in approvals. The Australian Government should encourage ‘an attitude of welcome’ to Chinese companies. Robin Chalmers, the only non-Chinese director of Sinosteel, said the government had recently asked a Chinese company to limit itself to 49.9 per cent of a target company as a precondition for granting its approval of a foreign-investment proposal.
By now, Clinton Dines, a fellow Chinese expert from Rudd’s native Queensland, had become president of BHP Billiton China. He and his wife had even adopted a Chinese child and, at his urging, the company had been quick to appreciate the significance of the Olympics to China and became an official sponsor, providing the gold, silver and bronze for all the medals to be awarded. In August, Marius Kloppers spent ten days at the Games, welcoming a line of VIPs to the company’s corporate-entertainment suite. ‘We actually didn’t have any formal investor discussions, or indeed customer discussions,’ he said. Pressed at an analysts’ meeting in London on whether there were any talks at all with Chinalco, he said there had been none, although ‘for the avoidance of doubt, Chinalco was one of the guests we took to the opening ceremony of the Olympics, along with a whole slew of other people’. 21
The takeover battle reached a new pitch of ferocity when, on 18 August, Kloppers reported net income of US$15.4 billion for the year ending 30 June, assisted by the jump in commodity prices, higher production and an ability to pass on higher costs. ‘We’re well set for the future,’ Kloppers said in a conference call with analysts. ‘We have a low-risk growth portfolio, we can contend with all sorts of headwinds and tailwinds and still turn in great results.’ 22
The results were staggering. No mining company had recorded such an astronomical figure before. But Rio was only briefly on the defensive. On 24 August, Treasurer Swan approved the acquisition of 14.99 per cent of Rio Tinto plc by Chinalco – about 11 per cent in the group, which included the Australian-listed Rio Tinto Limited. Any future proposal to increase its holding, he said, would require re-assessment at the time.
Two days later, Tom Albanese presented Marius Kloppers with an unwelcome present on his 46th birthday when, in reporting half-yearly pre-tax profits of $9.69 billion, he announced that Rio Tinto would pursue joint ventures with Chinalco around the world. And, in response to Kloppers’ jibe that he had ‘missed the boat in China’, Albanese stated that Rio would even increase its presence there.
One of the most interested observers of the drama was Sir Robert Wilson, Rio’s former chairman and chief executive. ‘Things have moved on, of course,’ he told the authors, ‘and you have to say: do the advantages really still outweigh the disadvantages [of a prospective BHP–Rio merger]? Are those cost-saving synergies really that material?
‘You shouldn’t overlook the disadvantages of scale and manageability. We can already see companies, arguably in the oil-and-gas industry, which have become so big they can’t really be managed. So I think there’s a bit of a risk there. And what both companies would lose is actually the incentive to improve, because it would be daft to deny that for decades BHP and Rio Tinto have been sharpened by rivalry. Take that away and what have you got? You’ve got, potentially, a big stodgy vegetable.’ 23
Despite the Chinese manoeuvring and an announcement by the European Commission in September that a decision would not be made until January 2009, Kloppers and Argus maintained the pressure on Rio. Kloppers’ campaign scored a major victory on 1 October 2008 when ACCC head Graeme Samuel announced approval of the takeover. Indeed, the ACCC comprehensively rejected the assertion that a BHP Billiton–Rio Tinto conglomerate would permit the new entity and its competitor, Vale, to manipulate the iron-ore market. ‘This is because increasing demand, the heterogeneous nature of iron-ore production and infrastructure expansion projects, and the corresponding threat of non-compliance would be likely to destabilise any potential tacit or explicit consensus between the merged firm and Vale,’ he said. ‘Accordingly, the evidence provided to the ACCC did not establish that the proposed acquisition is likely to substantially lessen competition in the global seaborne supply of iron-ore lump and iron-ore fines.’ 24
So decisive was the ACCC finding that analysts judged the European Union would almost certainly follow suit. Until the announcement, Rio Tinto had been priced on the belief that the regulators might reject the deal. In the wake of Samuel’s decision, the stock surged 12.4 per cent. And, in short order, the United States Department of Justice cleared the way without any objections.
But then, deliberately and hypnotically, the world of Don Argus, Marius Kloppers, Tom Albanese and the other metal men turned on its head. In October/November, the Wall Street financial crisis sent stock exchanges around the world into a state of chaotic disarray and the share market plummeted. Amid fears of an international recession, commodity prices slumped dramatically and mining stocks followed. The men at the top of the great extractive industries found their glorious certainties of six months ago crashing about their ears.
It was a new and unnerving experience. In many ways, the giant mining companies – BHP Billiton chief among them – had come to resemble medieval nation states, their rulers unencumbered by the demands of democracy and answerable only to an oligarchy of shareholders whose concerns rarely strayed from the bottom line. Not since the heady days of BHP in the post-Second World War years had the company enjoyed such a sense of supreme self-determination. It made its own rules of engagement with the governments of the day, developed its own ethical standards for its employee citizenry, created its own department of external affairs and set its own goals for nonstop expansion. Indeed, Chip Goodyear’s famous analysis of 2000 had promised that this happy state of affairs would continue indefinitely whatever might befall the real nation states of the geopolitical world. Except, of course, if the world economy itself went into freefall.
The battle was in full swing when BHP Billiton’s big guns gathered in London to show solidarity with their chief executive at the annual general meeting of BHP Billiton plc on 23 October 2008. As the ten o’clock chimes of Big Ben peeled across Westminster, Don Argus pulled up in a chauffeured sedan outside the Queen Elizabeth II conference centre on the northern side of Parliament Square. Clad in an overcoat against the autumn chill, he paused inside the car for a few moments, a mobile phone clamped to his ear, to finish a call and then alighted and threw one of his beaming smiles to the line of shareholders and reporters being frisked for cameras, recording devices and weapons by security guards in the foyer.
All the directors were present, including three new appointees: 60-year-old American Alan L. Boeckmann (chairman and chief executive of the massive engineering-and-construction giant Fluor Corporation), 61-year-old Australian David Morgan (formerly chief executive of Westpac) and 54-year-old South African Keith Rumble (formerly of Rio Tinto and Impala Platinum, with recent valuable experience in private-equity investments in Russia and India). There was also a good turnout of the group management committee – Alberto Calderon (chief commercial officer), Marcus Randolph (chief executive ferrous and coal), former company secretary Karen Wood (now chief people officer) and Mike Yeager (chief executive petroleum). Sitting next to Alex Vanselow, the burly Brazilian chief financial officer, in the directors’ line-up was Paul Anderson, sporting a new Hemingway salt-and-pepper beard and, in common with most of his colleagues, wearing a red Armistice Day poppy in his buttonhole.
Despite the economic downturn, it had been an exceptionally fine financial year for BHP Billiton, partly due to oil prices reaching US$145 a barrel. There was a lot to boast about, and Don Argus launched into paeans of praise for the company’s record profit of US$15.4 billion – the seventh consecutive full-year profit increase – a 38 per cent return on capital and 41 cent per share dividend, up for the thirteenth consecutive year. ‘As an old bank man, let me tell you this is a marvellous balance sheet,’ he said. ‘The current financial crisis will severely impact on the share price for some time, but our diversified portfolio and strong balance sheet put us in a good position in a cash-strapped environment.’
At 10.40am, Marius Kloppers took the lectern to make his first report to an annual general meeting as chief executive (on a basic salary, the meeting was informed, of US$1,979,500). ‘We are committed to a strategy of larger, long-life, low-cost, world-class assets diversified by geography,’ he said. ‘They are expandable and consistent in profit, and robust in a down cycle. Diversification reduces risk by not having all our eggs in one basket.’
Turning to Rio Tinto, he said, ‘BHP and Rio Tinto are uniquely configured in the commodities we produce, in our geographies, in our customers and in the way we do business. But the synergies can only be unlocked through a combination of the two companies.’
Afterwards, Don Argus strolled upstairs to join shareholders over a buffet lunch. He asked one of the authors what the word was around London about the BHP bid. Told that Sir Robert Wilson thought the combined company might be too big to manage, The Don beamed and replied that while that might apply to some industries, ‘mining is different’. He had told the meeting that he expected the takeover bid to be decided early in 2009 after all the regulators had reported their findings. BHP would send acceptance forms to Rio shareholders and an extraordinary general meeting would be held for BHP investors. But late that afternoon a spectre loomed over Westminster. For word swept through the BHPB hierarchy that Argus had been summoned to an urgent meeting with the European Commission’s competition regulator based in Brussels. Something was up.
Coincidentally, rumblings about the international share market had begun at precisely the time Marius Kloppers was about to make his audacious bid for Rio. In September/October 2007, the New York Stock Exchange responded to a realisation that the United States housing boom was in fact a bubble inflated by ‘sub-prime’ loans, a euphemism that would disguise the true dimensions of the disaster for some time. Indeed, the early predictions from Wall Street – after the failure of Bear Stearns, a big United States stockbroker, in March 2008 and the bounce-back that followed – were that the losses from home buyers unable to meet mortgage repayments would represent little more than a ‘speed hump’ on that endless pathway of prosperity.
Only gradually did the world’s share traders become aware of the complex financial instruments developed to market the mortgages. From 2000, as house prices rose, lenders had developed adjustable-rate mortgages (ARMs) with low ‘teaser rates’, no down payments and even the postponement of some interest monthly payments that were added to the principal of the loan. Then they added mortgage-backed securities (MBS) – the pooling of mortgages into packages for sale to investors who received pro-rata payments of principal and interest by the borrowers. Collateralised debt obligations (CDOs) followed, in which some of the MBS were repackaged, often with other asset-backed securities, and sold even further afield to investors – including banks – around the world. And, as the regulators in George W. Bush’s America turned a blind eye, these sub-prime derivatives multiplied like runaway cancer cells through the globe’s financial body politic.
Even more reprehensible, perhaps, were the actions of the credit-rating agencies Moody’s, Standard & Poors and Fitch, who encouraged the spread of the disease with their high ratings for the companies selling the derivatives. ‘The story of the credit-rating agencies is a story of colossal failure,’ Henry Waxman, chairman of the House of Representatives oversight and government-reform committee, said at a public hearing. ‘Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust. The result is that our entire financial system is now at risk.’ 25
Indeed, after the collapse of the 158-year-old Wall Street institution Lehman Brothers on 15 September, global credit markets simply froze as banks were unable or unwilling to risk lending to each other, let alone clients who relied on credit rollovers to maintain their businesses.
Government leaders responded by posting guarantees in an attempt to unlock the credit freeze but it quickly became clear that a major international recession was unavoidable. First, the United States and then Europe tumbled into the abyss. Even China was forced to recalibrate its growth forecast down from ten per cent to eight and then seven. Australia struggled to keep its head just above the recession waterline.
At BHP Billiton, Don Argus and Marius Kloppers watched as their share price slid ever downward from a high of $55 in May 2008 to hover around $24 by December. At the same time, Rio had collapsed from $155 in May to a low of $39. So, on one reading, the takeover bid of 3.4 for one was wildly overpriced, especially when Rio was carrying the US$40 billion Alcan debt to BHP Billiton’s relatively modest US$6.5 billion. However, in early November the European Commission presented the BHP Billiton team with a confidential ‘list of objections’ that would require the company to sell some major iron-ore and coal assets at a time when market conditions could hardly have been less favourable. Kloppers’ war was suddenly being fought on an entirely new battlefield.
At the same time, Tom Albanese was feeling the strain. He had decided to press ahead with a $1 billion project in primitive Madagascar to mine ilmenite – used mainly in paint – and build a massive deep-water port in a cyclone-ravaged area to get it out to world markets. Progress was slow and the price was falling catastrophically. On his other flank, he was frantically trying to establish joint ventures with Chinalco to develop more iron-ore projects and make the takeover that much more difficult.
But for Kloppers, in the 28th-floor eyrie of his Melbourne headquarters, the real problem was the US$40 billion Alcan debt on the Rio Tinto books, plus a BHPB undertaking to buy back $US30 billion of its shares after the takeover. In a rising market, all of that could be incorporated into the balance sheet with relatively little discomfort. As share prices fell and mid-term-growth prospects evaporated, it became virtually indigestible.
Kloppers and his team worked day and night on the problem, approaching it from every possible angle. But, in the end, the young chief executive knew he had no choice. Throughout the process, he had kept Argus briefed on both tactics and strategy. Both men knew that they had to present a united front. And when Kloppers reached the terminal decision in the last week of November, he sat down with the hard-bitten Queenslander and laid out his reasoning.
Argus’s banking background made the final decision inevitable, and when it went to the full board they made it unanimous. They would not meet the European Union conditions, and even if the European Union competition commissioner, Ms Neelie Kroes, then cleared the deal they would ask their shareholders to vote it down. The 18 months of Project de Bello – the planning, the tactical manoeuvring, the broadsides, the diplomacy and the expenditure (US$450 million in hard cash, plus an incalculable amount in the plunging share price and lost opportunities) – had gone for naught. The battle had been waged but only vaulting ambition had been vanquished.
Albanese scoffed at the US$40 billion ‘excuse’ for withdrawing the bid, claiming his company was well positioned. In his view, it was solely the actions of the European Commission that had scuppered the bid. Two weeks later, however, the precarious position of Rio became clear when he was forced to announce the shedding of a massive 17,000 jobs worldwide.
On 25 November, when BHP Billiton’s board announced the withdrawal, they authorised a face-saver for their champion. It came in the form of a US$4.8 billion investment to increase production in their West Australian iron-ore holdings by 50 million tonnes to 205 million tonnes a year. It was an oddly contradictory gesture at a time when they were blaming future prospects for pulling out of the takeover, but Argus pressed the point home at a media conference with his repeated assurances that, ‘Marius and his team have the full support of the board.’
He also took the opportunity to assert his own determination to stay as chairman for another full year, despite earlier suggestions that he would step down when the deal was concluded. So, was it really all over?
Kloppers: ‘Obviously, we wouldn’t like to speculate on anything that can happen going forward. We clearly have a balance sheet we believe is very robust, a balance sheet unlike any other in the industry. The management team here realises that as the effects of this ecomonic cycle become clearer, there might be other opportunities.’
In the longer term, he said, China’s growth and urbanisation would return the mining industry to prosperity. ‘We have changed nothing in our long-term view,’ he said. ‘If the non-China world – which consumes roughly 65–70 per cent of product – returns to trend and China continues to industrialise, the world is going to need our products.’
At BHPB’s annual meeting in Melbourne on 27 November, Don Argus performed the funeral rites on the bid when he told shareholders that the ‘almost unprecedented global financial crisis’ would have meant forming a US$84 billion company with US$78 billion of debt.
Back in August, Kloppers had labelled his bid for Rio Tinto ‘a deal for all seasons’, inferring it could withstand all extremes of heat, cold and turbulence. But as the glowering winter skies descended on Brussels and New York, it shrivelled and died in the economic gloom. And at last the ‘supreme realist’ allowed himself a brief moment of remorse. ‘There is a sense of loss,’ he admitted. 26