MELBOURNE BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) ditched plans to form the world's biggest iron-ore joint venture, in a victory for steelmakers that could prompt both miners to step up competing expansions.
The announcement marked the second failed attempt in three years by BHP chief executive Marius Kloppers to buy into Rio's superior iron ore assets, and strengthens the hand of steel mills which feared the pair would gain too much pricing control.
Monday's long-expected news also left BHP focusing squarely on a $39 billion hostile bid for fertilizer group Potash Corp (POT.TO), no longer distracted by the $116 billion marriage of the two miners' mammoth Australian iron ore operations.
"The failure of the joint venture will be slightly more positive for Rio than BHP, but it's important to remember it's actually a negative for both companies," said Ben Lyons, an analyst at ATI Asset Management.
A joint venture between Rio (RIO.L) and BHP (BLT.L), the world's second and third largest iron ore miners, would have eclipsed Brazil's Vale (VALE5.SA), the world's largest supplier, and would have reaped more than $10 billion in savings from combining rail and port operations.
BHP and Rio Tinto had a fall-back option to share some iron ore infrastructure in the event the full joint venture failed, but this "Plan B" is also in doubt, given the opposition that has emerged among competition regulators to the venture.
Analysts had estimated Plan B could yield at least half of the savings envisaged in the joint venture plan.
Now, BHP and Rio Tinto will have to review regulators' objections to their joint venture plan to gauge whether even a more modest collaboration would be allowed, a source close to the process said.
The failure of the deal was widely expected after European regulators indicated they would block the deal, so the share price reaction was muted: BHP shares in London fell 1.4 percent and Rio Tinto lost 1.9 percent, compared to a 1.6 percent loss in the British mining index .FTNMX1770 on weak metals prices.
INVESTMENT BANKS: ANOTHER ONE GETS AWAY
Goldman Sachs (GS.N), Gresham Partners and Lazard (LAZ.N) will miss out on advisory fees from BHP, while Morgan Stanley (MS.N), Credit Suisse CSGN.VX and Macquarie (MQG.AX) will miss out on fees from Rio Tinto, in what ranked as the biggest deal in Asia and Europe last year, Thomson Reuters data shows.
Rio Tinto and BHP were recently advised that their proposal would not be approved by competition watchdogs in the European Union, Australian, Japan, South Korea and Germany.
"Extensive discussions with the European Commission indicated the companies would not be able to go ahead with the joint venture without large divestments, which would have destroyed the synergies and eroded long-term growth options," the source said.
Steelmakers cheered the outcome on Monday which would leave 30 percent of global iron ore seaborne trade in the hands of Vale, 25 percent with Rio Tinto and 15 percent with BHP.
"Today's announcement... is a victory for competition in the international raw materials market," said Director General Gordon Moffat of Europe's steel industry group EUROFER.
"We were concerned about the monopoly of a proposed joint venture of Rio and BHP. We are relieved that the deal is not going to happen," said a spokesman at South Korea's POSCO (005490.KS), the world's no.3 steelmaker.
Both Rio Tinto and BHP are now likely to accelerate their separate, competing expansion plans, given that collaboration among major iron ore producers now looks like a lost cause.
Rio is in a much better position now to survive without the joint venture than when the deal was announced in 2009, when it was desperately slashing $40 billion in debt.
Both companies have been going ahead with production expansions independently, with Rio having already committed around $1 billion as it prepares to boost output by about 50 percent to 330 million tonnes of iron ore a year.
BHP stood to gain more from the venture, as Rio has more rail and port capacity to handle growing iron ore exports. That's why it tried to take over Rio Tinto in 2008, but called off that hostile bid when the global financial crisis hit.
"It certainly is a bigger blight on BHP's management than Rio's -- their inability to consummate a deal for the second time," said James Bruce, portfolio manager at Perpetual Investments.
The JV's failure increases prospects of BHP returning capital to shareholders next year as high minerals prices create healthy cash flows, Liberum Capital in London said.
Now that BHP does not have to pay $5.8 billion to Rio as part of the deal, it may have enough firepower for a $10 billion share buyback while Rio may be able to afford a buyback of up to $15 billion, it said in a note.
Rio Tinto and BHP agreed to call off the joint venture without triggering a $276 million break fee.
(Additional reporting by Miranda Maxwell and Narayanan Somasundaram in SYDNEY, Hyunjoo Jin in SEOUL, Nobuhiro Kubo in TOKYO and Eric Onstad in LONDON; Editing by Mark Bendeich, Anshuman Daga and Hans Peters)