The tanking world economy got the most blame when BHP Billiton dropped its $66 billion bid for Rio Tinto last week, but tough demands from EU competition officials were the more likely nail in the coffin.
BHP may have highlighted the downturn in metals markets to deflect tough questions about whether it misread the difficulty in gaining EU clearance for its mega-merger, some analysts and industry players said.
"Whilst the 'global economic conditions' have been cited as a reason by BHP Billiton for not continuing to pursue (the deal), we believe that reality is a little more complex," said Andrew Keen at Bernstein Research.
"We suspect that anti-trust divestments were eventually more challenging than management expected and this proved critical to the decision."
BHP, the world's biggest mining group, argued from the start when it announced plans for a bid a year ago that neither competition concerns by global regulators nor a possible downturn would be obstacles to finalising a deal.
Chief Executive Marius Kloppers and other officials continued to boast as recently as several weeks ago that a collapse in metals markets was good for the deal. Kloppers had billed the Rio takeover as a deal "for all seasons".
As recently as Oct 13, Alberto Calderon, who headed BHP's takeover team, repeated in an interview with Reuters that the deal was more profitable in a weak market.
"This works even better because the synergies become a bigger percentage in a down market," said Calderon, also chief commercial officer.
While the firm said a key reason in torpedoing the deal was that it was unsure when markets might turn higher, it was confident enough about the long-term health of metals demand to approve the same day a $4.8 billion expansion of its Australia iron ore mines.
ANTI-TRUST
In recent weeks, as the EU released a document outlining its concerns with the deal, cracks began emerging in the firm's touted confidence in gaining regulatory approval.
When the deal was first announced last year, BHP said it had done extensive analysis and was confident about meeting regulators' concerns. It was likely the firm would not have to make any divestments at all, Kloppers said initially.
Initial decisions from regulators were good news: approvals from Australia, the United States and South Africa.
In his October interview, however, Calderon stressed that any demands for divestments from the EU would have to be "manageable", indicating that the company was worried about heavier demands than originally expected.
The EU's statement of objections was never released to the public, but a source who saw the document said the wording made clear that BHP would be forced to sell off mines in its prime Pilbara region in the north of Western Australia.
"I think it would be quite clear that a remedy would be required in the Pilbara, from the way this is written," said the source, who declined to be named because the Commission document is confidential.
"There's quite a lengthy discussion about the material out of the Pilbara and price negotiations between the leading customers and the leading producers. I don't read this as indicating that they could come back and just say I just want to make divestments outside of the Pilbara."
The Pilbara was the heart of an expected $3.7 billion of synergies BHP counted on reaping from the deal since both firms have their flagship iron ore operations there.
"BHPB under new CEO Marius Kloppers I think has misjudged the ferocity of the anti-trust process," Michael Rawlinson at Liberum Capital in London said.
George Moffat, director general of Eurofer, which represents the European steel industry and was strongly opposed to the merger, said the Commission would have only been satisfied with extensive divestments.
"I think they clearly underestimated the concerns of the Commission and also possibly underestimated the power of the Commission to block this deal."
Brussels-based Eurofer had argued that no divestments would have been enough to ease concerns that bringing together the second and third biggest iron ore producers would have left the new firm with a tight grasp on pricing.
"The remedies that would have been required would probably have been a substantial disposal of assets in the Pilbara, more than Robe River, involving other mines as well, plus infrastructure, plus reserves."
Analysts have said that BHP had probably prepared to offer to sell Rio Tinto's Robe River operation, since it was separate from the most other operations and would not disrupt synergies.
Iron ore was not the only issue. The Commission was also concerned about coking coal used in steelmaking and its document noted that the combined firm would have had a monopoly in hard coal.
"The situation in hard coal was significantly worse than soft coal. It was actually moving from two suppliers to one supplier controlling the world market," the source who saw the document said.
