Since the scrapping of its takeover for Rio Tinto, BHP Billiton’s shareholders have rejoiced, sending the big Australian’s shares 25% higher between the announcement and close of trade on Friday, and dragging the rest of the ASX with it. But as the euphoria settles, the reality of BHP’s massive outlay on corporate advice for the deal has emerged.
BHP’s takeover of rival Rio Tinto was supposed to cost it around $104 billion, one of the biggest merger and acquisition deals in history. Yet despite the size of the deal, the fees paid to transact it are even more staggering. An estimated $US3.6 billion ($5 billion) was earmarked in advisory fees, of which approximately $US450 million ($690 million) has already been spent. These figures have already been reported in the media, but perhaps in a world of big numbers their reality hasn’t really sunk in.
If you took $US3.6 billion to a bank in $100 Ben Franklin notes, stacked up they would reach four kilometres into the sky. Look at it another way and these “direct fees and expenses associated with the transanction”, as BHP described it in a US Securities and Exchange Commission filing on October 8, would form a pretty sizeable mining company. The market capitalisation of OZ Minerals is less than a fifth of that.
And what of the fees already spent? Indeed, where were they spent? With $US450 million you could easily buy 10 million executive lunches to discuss the merger with your accountants and lawyers, or over a billion Bic ballpoint pens to sign the deal with (maybe more with a bulk discount). If you were feeling a little bit more expansive, you could buy over 50,000 Caran d’Ache fountain pens of the finest craftsmanship and the rarest jewels — one for every BHP employee across five continents.
The money might have better been spent on 180 Ferrari FXX supercars, and while the Italian Stallion may baulk at the idea of building so many of the ultra-exclusive vehicles, that would provide exactly ten cars for each member of the BHP board and executive suite. It might provide just as much excitement as a Rio Tinto tie-up too.
Better still, the money might have been spent on new projects.
All in all, the amount BHP has already spent on advice — or what Don Argus described in a conference call the night of the announcement as “research” — is over twice the market capitalisation of a not insignificant company like Mount Gibson Iron. Rio Tinto, while not yet releasing figures, tells us that its own spend on the defence was “not material in Rio Tinto terms.” It has been estimated by Thomson Reuters that Rio Tinto planned to spend $US162 million in total.
BHP Billiton was advised by Goldman Sachs JBWere, Gresham Partners, BNP Paribas, UBS, Lazard Carnegie Wylie, Merrill Lynch, Citigroup and HSBC. Rio Tinto’s phalanx included troops from Morgan Stanley, Macquarie Group, Deutsche Bank, JPMorgan, Rothschild, Societe Generale, Credit Suisse and ABN Amro. One source said: “virtually every merchant banker in the country was on one side of this deal or the other. That’s why it costed so much.”
“It boggles my mind,” says Helen Dent, acting chair of the Australian Shareholders Association.
“This is a situation that companies face all the time, when they’re considering mergers and acquisitions, but whether the gains are worth the costs remains to be seen. There is an extraordinary amount of merger activity that ends up trashing shareholder value.”
But here’s the real rub: when Chinese aluminium giant Chinalco made its audacious purchase of 9% of Rio in January no great army of Caran d’Ache-wielding bankers was called upon. Instead a small team from Lehman Brothers was dispatched and lest you think the words Lehman and austerity are mutually exclusive, Lehman’s China investment banking chief Zhizhong Yang even acted as the press conference translator. For Chinalco that meant one less plane ticket to buy and one less seat to book at the executive lunch.
Shared 50:50 with Alcoa, Chinalco spent a paltry $US14.9 million ($23 million) on Lehman’s advice, with another $US14.9 million going to China International Capital Co, an investment bank headquartered in Beijing. According to information compiled by Thomson Reuters and market data firm Freeman & Co, the total spend came to just $US29,848,000.
To put that into context, that’s only 40 million biros or 12 Ferrari FXX supercars.