Top global miner BHP Billiton dropped a $66 billion hostile offer for rival Rio Tinto on Tuesday, the latest casualty of a global crisis that has frozen credit markets and hit demand for raw materials.
BHP shares jumped more than a fifth in hectic London trading, while Rio Tinto slumped as much as 40 percent.
BHP Chief Executive Marius Kloppers said the global market turmoil and a slump in commodity prices had altered what had been a "compelling" case for merging the world's second- and third-largest iron ore producers behind Brazil's Vale.
"There's certainly been no indication BHP would do this — it's a surprise," said Tim Barker, resources analyst at BT Financial Group in Sydney, suggesting that BHP Billiton would now come under pressure to return more of its cash to shareholders.
When BHP first put forward its all-share offer for Rio late last year, it was worth close to $140 billion and would have been the second biggest bid in corporate history after Vodafone's acquisition of Mannesmann in 2000.
For graphic on BHP/Rio shares, click https://customers.reuters.com/d/graphics/AU_BHP1108.gif
"The greater debt exposure of the combination, plus the difficulty of divesting assets, have increased the risks to shareholder value to an unacceptable level," Kloppers said in a statement.
BHP, which had already won U.S. and Australian regulatory clearance for a deal, said it had been ready to offer concessions to Brussels to secure the European Commission's blessing, but would not have been able to sell assets at a fair price in the current climate.
BHP will write off about $450 million in bid costs, mostly tied to a $55 billion debt facility lined up to refinance Rio's debt, and also took $2.1 billion in pre-tax writedowns on nickel assets, but the miner stressed its balance sheet remained strong.
"We have a great future without this transaction," Kloppers told a briefing, citing the group's decision to go ahead with a $4.8 billion expansion of its Australian iron ore mines.
He also said BHP would stay on the lookout for other acquisition opportunities as weaker rivals suffered.
Rio Tinto, which had consistently rejected BHP's sweetened offer of 3.4 of its shares for each Rio share as undervaluing the company, said it had no immediate comment.
REACTION
Kloppers, who hatched the deal at the top of the commodities boom, and BHP Chairman Don Argus were forced by reporters on Tuesday to defend their own positions after pulling the bid.
Prices of major world commodities such as copper and iron ore have halved in the five months since peaking in July.
Global steelmakers had opposed the deal, fearing a mega-merger that would control more than a third of the world's seaborne trade in iron ore, the main raw component in steel, would yield too much clout over pricing.
"It's positive news for steelmakers because a merger of the two big miners would have meant a supply shortage of iron ore and higher prices. Now that raw material prices have plunged, BHP sees no merit in a costly merger," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
Michael Komesaroff, managing director at Urandaline Investments, said the market had moved against a deal, noting Rio's high level of debt.
"The market has changed dramatically in the last six months. What made sense six months ago doesn't make sense now. People talked about synergies in iron ore. Those synergies are still there, but nobody is prepared to pay for them," he said.
"Rio has $42 billion in debt and BHP only $6 billion," said James Wilson, mining analyst at DJ Carmichael & Co in Perth.
"There's no way BHP wants to take on that kind of debt. This, combined with obstacles with the European Union left BHP little choice but to pull the offer."
The decision sent BHP's debt protection costs sharply lower, with 5-year credit default swaps tightening by 130 basis points to 305 basis points, although 5-year CDS on Rio were unchanged at 800 bps amid concerns over its relatively higher debt levels.
That means it costs 305,000 euros ($392,700) and 800,000 euros ($1 million) a year respectively to protect 10 million euros of each company's debt against default.
