CHAPTER 9
Through all the Sturm und Drang of the 1980s, Brian Loton quietly advanced his main objective of turning BHP into a multinational company that could reap a great harvest from overseas investments. ‘We don’t underestimate the difficulties of going multinational,’ the 56-year-old chief executive told the New York Times during a flying visit to the United States in the company Gulfstream jet in 1985. ‘But we aren’t daunted by them. We have been involved in the international world for a long time.’ 1
BHP’s quest for offshore assets had come after many years of operating with foreign companies in joint ventures at home. ‘Every major international resource company interested in venturing into Australia has, sooner or later, to knock on BHP’s door,’ says Arthur Reef, a consultant to AMAX, the American mining company that partnered BHP in the Pilbara iron-ore operation. ‘Those knocks have resulted in countless joint ventures. The experience has been invaluable to BHP.’ 2
The Prop had already infiltrated the American steel and oil markets, producing around 40 per cent of its revenues in American dollars, while 85 per cent of its costs were paid in the cheaper Australian currency. The margin was such that every one-cent swing in the exchange rate represented a US$13 million shift in BHP’s profits. 3
The man who provided Loton with a golden opportunity to boost the company’s American assets was John Francis Welch Jr, the blue-eyed Irish-American boss of the massive General Electric Company. Welch was known to corporate America as ‘Neutron Jack’, because, it was said, whenever he took over a company the buildings remained intact but the people vanished. On becoming the youngest-ever chief executive of Thomas Edison’s old firm in 1981, the 45-year-old had embarked on a five-year program of acquisition and divestment, closing 73 plants and facilities and slashing GE’s staff from 411,000 at the end of 1980 to 299,000 at the end of 1985. 4
When he applied his cast-iron rule of ‘fix it, sell it or fold it’ to one of GE’s main subsidiaries, Utah International Inc., BHP was presented with the chance to acquire the American miner’s valuable assets not only in the United States but also in South Africa, Peru, Chile – and Australia itself.
Jack Welch’s predecessor, Reginald H. Jones, had purchased Utah in 1976 as a hedge against inflation for US$2.3 billion 5 in the largest acquisition ever seen in the United States. ‘The chairman of Utah, Edmund Wattis “Ed” Littlefield, was on the board of General Electric,’ says Tim Winterer, a mining engineer who had joined Utah in the iron country around Cedar City in south-western Utah in 1960. ‘He convinced Reg Jones that GE ought to have a minerals division, but when Jack Welch became chairman he said, “What are we doing with this mining company? Get rid of it!”’ 6
Welch wanted consistent income growth from all of his sectors, and the cyclical nature of the minerals market in which prices fluctuated wildly according to the laws of supply and demand concerned him. ‘I didn’t like the natural-resource business, where I felt events were often beyond your control,’ he explains. 7
The Utah Construction Company, founded in 1900 by Littlefield’s grandfather Edmund Wattis and his brothers William and Warren Wattis, had built the massive Hoover Dam on the Colorado River and the bomb-proof silos that housed intercontinental ballistic missiles. In between, Utah diversified into mining with the purchase of the Marcona copper mine in Peru, the Pathfinder uranium mines in Wyoming and the Navajo coal mine and power plant in the Four Corners area of the south-west United States, where the borders of Arizona, Colorado, New Mexico and Utah all meet.
The company moved from Ogden, Utah, to new headquarters in San Francisco and changed its name to Utah Construction & Mining Company, which first came to Australia to work on Victoria’s Eildon Dam and the Snowy Mountains Scheme. Its excavation expertise made it a natural contender for open-cut mining, with the result that one of its subsidiaries, the Utah Development Company, largely developed the Central Queensland coal deposits to supply metallurgical (or coking) coal to a thriving world steel industry.
The existence of coal in the Bowen Basin had been known for many years but, owing to lack of demand, the Queensland Mines Department had never conducted a detailed geological survey of the area. In the late 1950s, Utah geologist Richard Ellett searched the basin for minerals suitable for large-scale open-cut mining, especially iron ore and coking coal. As a result, Utah took out exploration permits covering 2400 square miles and hired local geologist Don King, who located the gently sloping sides of the coal seam through test drilling. The Blackwater open-cut mine was opened by the Queensland premier, Jack Pizzey, and Littlefield’s predecessor as Utah’s chairman, Marriner S. Eccles, at a ceremony at the mining site on 11 May 1968.
On the Utah side, the prime movers in the deal with the State of Queensland had been its president, Alexander M. ‘Bud’ Wilson, senior vice president Keith Wallace and Ralph Long, who became Blackwater’s first manager. The most powerful advocate in the Queensland Government was Johannes Bjelke-Petersen, who became premier in August 1968 following Jack Pizzey’s sudden death. The Kingaroy peanut-farmer-turned- politician was quick to take the initiative in promoting the state’s minerals abroad, particularly to the Japanese. Dignitaries turning up at a reception in Tokyo found that the centrepiece was a large ice sculpture in the shape of Australia, with the state of Queensland highlighted in blue. ‘During the evening, the ice melted and the southern states gradually disappeared until only Queensland was left,’ says Gillespie Robertson, one of the Utah marketing men present. ‘Then we found out that the blue was really made of plastic.’ 8
The Utah men soon became aware that Bjelke-Petersen was somewhat touchy on the question of interstate rivalry. Robertson, who had worked at Utah headquarters in San Francisco, was posted to Sydney when Utah opened its marketing department in Australia. ‘We’d been advised that Sydney was the commercial hub of Australia,’ he says. ‘This was a big mistake. The Queensland Government didn’t appreciate it at all, so the office was quickly moved to Brisbane.’ 9
Under the Central Queensland Coal Associates Agreement Act, Utah and its Japanese partner, the Mitsubishi Development Company, were given the right to develop export coal mines at Blackwater, Goonyella, Peak Downs, Saraji and Norwich Park. The Queensland Government agreed to pay for roads, water supplies, hospitals and other facilities in the area and claim only a low royalty rate of five cents per ton until 2010 in return for profitable rail-freight charges. 10
‘The mines were all open-cut and were located in cattle country in the Bowen Basin but not very good cattle country, probably ten acres per cow and 20 inches of rain a year,’ says Tim Winterer, who became Utah’s chief engineer in Queensland in 1969. ‘I often met Bjelke-Petersen – he was quite a character, a down-to-earth guy, very religious. We were happy with the deal and I think he did a good deal for the state, too, although he was criticised because it was thought the royalties were too low. We ended up building a dam for the railroad and turning it over to the Queensland Railways Department, and we paid for the terminal at Hay Point.’ 11
Utah quickly became Australia’s largest exporter of coal. The tough-guy Australian actor Rod Taylor was hired to front a series of ‘good corporate citizen’ TV advertisements extolling the company’s virtues. ‘Well, it’s a long way from Hollywood to Hay Point, but that’s where I am right now,’ Rod declared. ‘South of Mackay, Queensland. The Utah Development Company built Hay Point. Utah is Australia’s largest exporter of coal. You know, they tell me, over the last decade, hundreds of millions of dollars have been spent up here. The important thing for Australia is that every time Utah spends a dollar it inspires other industries to spend $4. I learned there’s enough coal up here to last for hundreds of years, so development can continue to grow, the towns are going to grow larger, and the jobs are going to be increased. Utah is going to spend a lot more money in Australia, as will other industries. Utah believes in backing Australia.’
Jack Welch, however, did not believe in backing Utah. ‘It was clear in my mind the first day on the job that it had to go,’ he says. 12 Matters came to a head in late 1981 when Bud Wilson, who had stayed on as Utah’s chairman, was called to GE’s corporate headquarters at Fairfield, Connecticut, to explain a US$75 million shortfall in revenue after the Japanese had refused to accept contracted shipments of coal and a major labour dispute had broken out with the Australian mining unions. Within GE, it was holy writ that the company always made its numbers. If one business faltered, the others were obliged to make up the difference. But it was clear to Welch that Utah’s variable performance would prove an unacceptable drag on GE’s other divisions. 13
In 1982, after just one year in the top job, he went looking for a buyer. His mission got off to a rocky start when American natural-resources companies turned him down. According to Brian Loton, it was Ed Littlefield, one of Welch’s largest shareholders, who suggested that BHP seemed to be a natural fit for Utah, whose massive open-cut mines in the Bowen Basin complemented BHP’s coal-mining activities in New South Wales.
Welch’s deputy John Burlingame first raised the possibility of selling Utah to BHP in a private conversation with BHP’s chairman Jim McNeill during a visit to BHP House on 23 August 1982. ‘Utah wasn’t offered to anybody else,’ Brian Loton recalls. ‘Jack Welch and his people had decided that BHP were the logical buyers and it would be worth more to us than to anybody else, which is quite true.’ 14 As we shall see, there was in fact another prospective buyer – revealed here for the first time.
Burlingame valued all of Utah’s assets at a colossal US$3.5 billion – which was actually half a billion dollars more than BHP’s capital value at that time. Nevertheless, BHP’s directors decided at a board meeting on 10 September to enter into negotiations with GE – a decision that marked the turning point in The Big Australian’s modern history. The directors accepted that if they didn’t buy Utah, BHP would revert to being a company with faltering steelworks and an ageing oilfield in Bass Strait, a company that was primarily dependent on one country – Japan – for most of its revenue. ‘Brian Loton’s vision of the Utah acquisition was that it should be used to expand the company overseas,’ says John Prescott, then general manager of BHP Transport. ‘Although the principal assets GE were offering were the coal mines in Queensland, Brian saw that Utah should be used to diversify BHP out of Australia because BHP was outgrowing its Australian market: steel was much more stagnant than it had previously been, the heydays had gone, there was a Labor Party in office in Canberra and after the early experience of a Labor Government in the early ’70s nobody was quite sure just how socialist they’d be and how much control they’d try and exercise. It turned out they didn’t, but we didn’t know that when we were acquiring Utah. But Brian had this vision and he managed to implement it.’ 15
Utah’s profits from its Queensland operation had soared from a modest $8 million in 1970 after all taxes, royalties and costs had been deducted to $137 million in 1976, the year it was snapped up by Reg Jones to diversify GE’s portfolio following the First Oil Shock. No other company operating in Australia had ever made so much money. At the same time, BHP recorded a profit of $63.5 million, less than half of Utah’s. And while BHP employed more than 60,000 Australian workers, Utah made do with just 2700. Since then, Utah continued to produce enormous profits despite Jack Welch’s innate abhorrence of the fluctuating nature of commodity prices.
Under Utah’s deal with the Queensland Government, coal was transported from the mines to the Hay Point terminal in trains consisting of six locomotives and 148 wagons carrying 8500 tons of coal worth $400,000. Every week, more than 70 such trains hauled the rich coking coal down to the coast to bulk ore carriers queuing up to take their cargoes to Japan and Europe. And each week the Utah Development Company rang up another $3 million in clear profit.
This arrangement seemed so beneficial to the American miner that in 1977 investigators from the ABC’s Four Corners program asked why the deal provided relatively few benefits to the Australian public but gave a huge return to Utah’s American shareholders. On the program, Doug Anthony, then federal minister for national resources, defended Utah as ‘a pathfinder of coal development in Queensland ... they went in, they explored the area, they developed it when coal prices were very low and they made a success of it’.
Paul Keating, the shadow minister, sounded a more nationalistic note. ‘While we certainly do need a proportion of foreign capital,’ he said, ‘the control and ownership of Australian resources ought to be the prime requirement of Australian resource-development policy.’
Much of Utah’s success, it was revealed, emanated from the deals it had done with the Queensland Government. State taxes and royalties paid by Utah in 1976 accounted for less than four per cent of the company’s total revenue, or $21 million, while rail freight to the Queensland Government amounted to ten per cent, or $56 million. At the same time, the company’s profit was nearly 25 per cent of the revenue, or $137 million. 16
The first meeting between representatives of BHP and GE to discuss Project Utah was scheduled to be held in Honolulu, roughly halfway between the head offices in Melbourne and New York, starting on 21 September 1982. Jack Welch told his vice chairman John Burlingame and senior vice president Frank Doyle to work out the best strategy, while Paolo Fresco, GE’s Italian-born, London-based vice president, was summoned to the States to lead the GE negotiating team. 17
On the BHP side, Brian Loton chose David Adam, an executive director for more than five years, as team leader and co-opted Bill Hunter, chief finance officer since 1979, to manage the intricate financing arrangements. In the ensuing reshuffle, Geoff Heeley, who had been treasurer, became acting finance director and Graeme McGregor replaced Heeley as treasurer. The two other members of the negotiating team were Russ Fynmore, head of the oil-and-gas division, whose brief was to examine Utah’s American energy subsidiary, Ladd Petroleum, and Dick Carter, general manager resource planning and development.
Both teams checked into the Kahala Hilton Hotel. Two of GE’s team, vice president Standley ‘Stan’ Hoch and tax counsel Walter Beaman, were alarmed when they arrived at the conference room at 8 am on Tuesday, 21 September 1982 to discover that hotel staff had placed a noticeboard outside the door with ‘General Electric’ boldly spelled out in white plastic letters.
The GE men were discussing this lapse in security when they were joined by David Adam and Bill Hunter. Someone had the bright idea of rearranging the letters to form an anagram that converted ‘General Electric’ into a mythical corporation called ‘Carter Gellee Inc’. From then on, Project Utah was known as ‘Carter Gellee’. 18
Negotiations got off to a promising start, with the BHP team learning that GE were looking for a price based on the discounted present value of future estimated cash flows. GE agreed to supply additional financial estimates to enable BHP to evaluate Utah’s various businesses. Its team also turned over a valuation of Utah prepared by Morgan Stanley the previous year.
The following month, Graeme McGregor was on his way to Mexico for a meeting of the International Federation of Accountants when he received instructions from Melbourne to go via New York and retain the mergers and acquisitions specialists Sullivan & Cromwell to advise BHP. Both BHP and GE had agreed to negotiate directly with each other, but BHP needed counsel’s opinion on United States acquisition and tax laws.
‘Utah would probably have preferred to stay with GE, where they were autonomous, as opposed to being merged into a bigger mining company,’ McGregor says. 19 However, the wishes of the Utah staff – and their counterparts at BHP Minerals – took second place to the urgent business at hand, as the two negotiating teams shuttled between Melbourne and New York. ‘There were some hiccups early in the piece,’ McGregor says. ‘Quite frankly, one of the things that worried our negotiators was a meeting where GE put a different team of negotiators in and tried to start afresh, which we didn’t think was appropriate.’ 20
After haggling, GE reduced the value of Utah’s assets, minus Ladd Petroleum, which it decided to retain, to US$2.85 billion, whereas BHP’s figure for the same package was US$2.375 billion. ‘We simply can’t afford it,’ David Adam pleaded on one occasion. ‘I’ll just have to put myself into your hands.’ 21
By agreement, Brian Loton and Jim McNeill kept their distance from the negotiations. ‘I was helping in the background, as it were,’ Loton says. ‘I knew Jack Welch reasonably well and met him at functions in San Francisco a few times during the negotiations.’ 22
As 1982 drew to a close, a couple of other Utah assets had been taken off the table, and the asking price whittled down to US$2.6 billion, enabling a letter of intent to be signed in mid-December. ‘There were handshakes all round,’ says Carrol Houser, human-resources vice president at GE, Utah and subsequently BHP, who later wrote a history of the Utah acquisition at Brian Loton’s request. All that remained was for BHP’s directors to give their approval at BHP’s regular December board meeting in Melbourne.
The manager of Utah Development’s operations in Australia since 1982 was James T. Curry, a civil engineer and Stanford business graduate who had once been Ed Littlefield’s assistant. He was based in Eagle Street, Brisbane, overlooking the broad sweep of the Brisbane River. The talks had been kept so secret that he was blissfully unaware of the drama unfolding around him. ‘I’d been down in Melbourne to see if we could find somebody to go on our local Utah board and I’d approached one of the members of the BHP board,’ he says. ‘He later told me that he knew this was going on and he knew I didn’t know. He was terribly concerned that he had to keep going along with this charade.’ 23
Jack Welch was in a celebratory mood when he arrived at the Park Lane Hotel in New York for the annual staff Christmas dinner-and-dance party. He was chatting and joking with senior executives and their wives when things started to go wrong. At 11 pm, John Burlingame was called off the dance floor and when he returned half an hour later he was visibly shaken. ‘Jack,’ he whispered, ‘the deal’s off. I got a call from Paolo. He said that BHP just called him to say its board couldn’t go through with it. They can’t swing it financially.’ 24
Welch was devastated: he had been counting on BHP to take this ill-fitting piece of the GE corporate jigsaw off his hands. After Christmas, he ordered Burlingame and his team to get into a huddle with BHP to resurrect Project Carter Gellee and work out a new deal. If BHP couldn’t raise the full asking price, Welch said, then GE would simply have to remove some more of the assets from the inventory.
On 27 January 1983, GE announced it had reached a tentative agreement to sell Utah International Inc. and the Utah-Marcona Corporation to BHP for US$2.4 billion in cash. 25 Under an agreement signed on 19 April, GE would retain the oil-and-gas producer Ladd Petroleum, as well as Utah’s interest in the Pathfinder uranium mines in Wyoming, the Trapper steam coal mine in Colorado and some land-development properties in the United States. 26 ‘Various things were done,’ John Prescott says. ‘We sold down the Queensland coal interests to Mitsubishi, Mitsui and a bunch of Australian banks, and we didn’t take the oil interests that were in the original package. We got the price down and finally went ahead with it.’ 27
Meanwhile, Graeme McGregor, who was casting the BHP net ever wider in the United States, met a polite young analyst with the New York investment banker Kidder, Peabody. His name was Charles Waterhouse Goodyear IV but everybody called him ‘Chip’. ‘I’ve been familiar with BHP for many, many years, but my first direct experience working with them was in 1983,’ Chip Goodyear says. ‘BHP were looking for some oil-and-gas acquisitions in the United States and I worked with Graeme McGregor, who was the treasurer at the time.’ 28
The Utah acquisition was finally concluded on 2 April 1984 when David Adam handed over BHP cheque no.0001, drawn on the Morgan Guaranty Trust Company of New York, for US$2,268,447,750 to GE’s Stan Hoch at the Wall Street offices of Sullivan & Cromwell. In return, he received a brown satchel containing the Utah share certificates.
The following evening, BHP hosted a dinner at New York’s Metropolitan Club. Murmuring broke out among the 80 guests when Robert Holmes à Court showed up unexpectedly as one of the new partners in the restructured Utah coking-coal joint ventures in Queensland. In a speech, David Adam welcomed his adversary as ‘Australia’s answer to T. Boone Pickins’, a remark that failed to raise a smile from its target. ‘David was irritated that this corporate raider had insinuated himself into the BHP celebration,’ Carrol Houser writes. ‘However, it was a minor irritation. In spite of it all, the evening was an extremely pleasant occasion.’ 29
In Brisbane, Brian Loton, accompanied by Bud Wilson and Jim Curry, announced that the Utah acquisition had been completed. As the TV cameras rolled, all of the expanded Central Queensland Coal Associates Joint Venture participants signed the agreement papers. There was one absentee: Premier Bjelke-Petersen, who was supposed to sign on behalf of the Queensland Government. Boarding Utah’s Learjet, Utah’s John Wruck pursued the premier to North Queensland, catching up with him at Townsville airport. The documents were signed on the wing of the aeroplane.
In a message to employees, Loton said that the Utah acquisition enabled BHP ‘to further diversify our mining interests. It will reduce our dependence on the fortunes of the world steel industry and it also means with Utah’s substantial mining interests we will gain greater access to more markets.’ 30
Early the following morning, a BHP – Utah team headed by Brian Loton boarded the BHP plane and headed for Tokyo. For ten days, the group visited business partners, customers, trading companies, bankers and government representatives in Japan, South Korea, China and Taiwan to show the flag and reassure everybody that BHP and Utah would continue to honour all existing commitments.
But not everybody was happy. Carrol Houser says BHP Minerals employees were openly critical of their new American colleagues. ‘Their attitude was, “Who the hell do these Americans think they are? We acquired them, we did a lot of work on this, we know about coal and we know about mining. Now, all of a sudden we’re frozen out.”’ 31 The BHP staff believed the acquisition should have opened up new overseas assignments for many Australians, so there was a lot of resentment in the ranks when Utah was given a huge amount of independence.
‘I was very impressed when BHP took us over that they didn’t try to press their culture on us at all,’ Jim Curry says. ‘I was put in charge of consolidating the Utah mines into the BHP mining operations. I was given a seat on the board, with the title of chief general manager of BHP Minerals. They wanted Jerry Ellis to get some experience on the mining side, so we put him into the slot as my deputy.
‘I was spending half the time in Melbourne and half in San Francisco. We had a house in South Yarra next to the Botanic Gardens and a house in California. We’d move down there for a month and then go back to the States. I had an office in BHP House. I didn’t have much staff at all, mostly people reporting to me who were in charge of big operations everywhere, so my job was to make sure everything was running as it should.’ 32
Incredibly, the Utah holdings contributed almost 20 per cent of Broken Hill’s profits in the first full year under its new owner, mostly from the Queensland coal mines and those in New Mexico at the Navajo Indian Reservation, which supplied two non-BHP coal-fired power plants.
The acquisition had also brought some risks: Utah owned gold and coal deposits in politically explosive South Africa, as well as the Escondida copper holdings in strife-torn Chile. Says Geoff Heeley, who was closely involved in the Utah transaction, ‘When I joined the company in 1956, we had steelworks at Newcastle, Port Kembla and Whyalla, we had some iron-ore mines in South Australia and we had the iron-ore deposit in Yampi Sound – I don’t think we’d even opened Koolyanobbing at that stage 33 – and we had coal mines in Newcastle and Port Kembla. We had limestone quarries in South Australia and New South Wales and manganese ore in Groote Island, 34 but basically it was a steel company.
‘When we acquired Utah, it was a very substantial organisation; it included coal mines in the Four Corners in the US, it included the Escondida deposit – at that stage it was only a known deposit, it wasn’t being mined – coal mines in Queensland and a whole stack of other assets. It was a very major acquisition and it was a roaring success.’ 35
News of the Utah deal attracted the keen eye of Bob Wilson, a young Londoner working as a strategist for Rio Tinto Zinc (RTZ). He said to his chief executive, Sir Alistair Frame, ‘BHP did really well to get themselves into a bilateral position on that transaction.’
‘Oh,’ Frame replied, ‘I never mentioned it but actually GE asked me if we’d be interested and I said, “No, it’s too big.”’
‘You can’t have done that!’ 36
Wilson laughs heartily at the memory but still finds it incredible. ‘I can see if he was just looking at “We’ve got to buy all of it or nothing” then he might have come to a snap decision,’ he says. ‘But you’ve got to be a little more creative than that: there are several ways of trying to do things – maybe a joint venture or agreeing with BHP or someone on a split of assets. I was probably a bit rude at the time.’ 37
Wilson was working on a copper project in Panama that was being touted as the best undeveloped copper prospect in the world when word reached him about Escondida. It seemed to him that the part of Utah that BHP had in mind – the real target for them – was the Queensland coal mines. As GE had placed no value on Escondida in the transaction because of the vast expense of opening it up, Wilson thought he might still be able to snaffle it from under BHP’s nose.
He suggested to Alistair Frame, ‘Why don’t you send a note to Brian Loton and say that I happened to be passing through Melbourne and would like to talk about whether there might be one or two things in Utah that they’re not really interested in?’
Frame complied, and, after a brief meeting with Brian Loton, Wilson was siphoned off to meet David Adam and Bill Hunter.
‘I’ll do you a favour,’ the visitor told them. ‘There’s a bit of stuff you picked up down there in Chile – not a very nice place anyway. Would you like me to take it off your hands?’
‘We don’t know what we’ve got yet,’ the BHP men countered. ‘We don’t know how we’re going to manage it. Thanks for coming and talking – we’ll call you back sometime.’
Wilson went away empty-handed then, but he would be back. He knew from his experience in the copper industry that Escondida contained a massive lode of copper, and he, and indeed BHP, would reap a rich harvest.