What next for Slaughters, Links as BHP seam runs dry?
8 December 2008
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BHP Billiton’s long-running battle to take over rival miner Rio Tinto finally ended last month, leaving both companies counting the cost of the failed merger – and ruing the eye-watering legal bills.
Since BHP first expressed an interest in its rival last November, the mining giant has notched up fees of £291m, most of which went to bankers.
Rio Tinto has been less forthcoming about the cost of defending the £40bn bid, but is estimated to have spent more than £100m.
The two law firms on either side of the deal are thought to have billed around £35m between them during the past year.
Slaughter and May, on behalf of BHP, first got the call in June 2007. It is understood to have billed up to £20m, with a team of five partners working on the bid alongside Australian firm Blake Dawson. The partners were: corporate partner Nigel Boardman, who is the relationship partner, having advised on BHP’s merger with Billiton in 2000; corporate partner Elizabeth Holden; finance partner Andrew Balfour; competition partner Malcolm Nicholson; and tax partner Jeanette Zaman.
The transaction kept the Slaughters team busy right up until its collapse, particularly on the competition side. As recently as August, BHP boss Marius Kloppers said it was “a deal for all seasons”, expressing his confidence about its completion.
Linklaters entered the fray two months after Slaughters and is understood to have taken away some £15m in fees. Corporate partners Richard Godden and James Inglis led the team for Rio Tinto, which is a longstanding client of the firm.
The £35m does not take into account all the other firms that became embroiled in the takeover, such as Allen & Overy for the banking ;consortium ;and Freshfields Bruckhaus Deringer, whose key mining client Xstrata briefly considered a bid.
The collapse of such a massive instruction is bound to leave a hole in any practice, especially given the sheer amount of work for both corporate and competition lawyers.
One lawyer close to Rio Tinto comments: “You can imagine there were all manner of alternative transactions that we’d have considered, from white knights to breakout bids.
“A huge amount of work goes into that, led by the core corporate team.”
Equally, the antitrust partners on both sides faced a considerable task.
Norton Rose competition partner ;Martin ;Coleman comments: “Any transaction that impacts on a number of different markets is complex. You have to look at each market separately.”
In light of this, and the fact that firms were reluctant to use junior lawyers on such an important deal, the £35m figure is less shocking. As one partner close to the deal says: “These are big numbers. Lots of partners involved over a long period of time.”
So why exactly did the takeover collapse? Predictably, BHP’s Kloppers blamed the credit crunch, saying it was not a good time to be taking on such a large debt.
However, ;it ;now ;looks increasingly likely that BHP (and Slaughters) underestimated how much of a problem competition issues would be.
The deal had been given clearance to proceed in the US and Australia, but the European Commission proved to be a major stumbling block.
A phase 2 investigation by regulators resulted in a list of objections running into many pages, including the possibility that BHP would have to dispose of some of its profitable iron ore businesses.
“People are beginning to wonder about the antitrust issues, whether they’d guessed that right,” says one magic circle partner. “There’s some speculation that BHP hadn’t anticipated it would have to sell the jewel in the crown.”
Another magic circle partner adds: “I think they misread the competition a little bit. Maybe they thought they were going to get an easier run.”
So where now for the lawyers who have spent more than a year working on a mega-deal that fell at the final hurdle?
Slaughters client BHP is unlikely to rush into further transactions, having been chastened by its experience with Rio Tinto. Indeed, the constriction of credit flow would rule out any significant deals regardless of the company’s desire to grow.
Rio Tinto, however, still has to tackle the $40bn (£27.09bn) debt built up during its takeover of Canadian aluminium producer Alcan last year. Linklaters, having advised on that deal and on Rio Tinto’s defence, is in pole position to pick up any instructions, whether on debt refinancing or for the disposal of assets.
Meanwhile, it remains possible that another investor will emerge while Rio Tinto’s share price is foundering. Chinese state-owned Chinalco already has a significant stake in the company following its audacious $14bn (£7.1bn) dawn raid in February. It is said to be watching the situation closely with regard to building its stake further.
“The Chinese have always been keen to secure the supply of materials where prices have increased, but the levels of Chinese demand are changing. They’re still going to be keen to have an interest in the miners themselves – it’s a question of how quickly they do that,” comments a magic circle corporate partner.
Chinalco’s legal adviser? The one magic circle firm not to have had any significant involvement in the year’s biggest takeover battle – Clifford Chance.