BHP Billiton had claimed its takeover of Rio was even more compelling in a bad market. Clearly that wasn't the case.
It has just canned its $US66 billion ($A104 billion) scrip offer even before it was due to go live in January. Rio shares will tank, BHP will fall, though not as far. Already the pricing on the deal was skewed in anticipation of BHP chairman Don Argus and his board pulling their grand plan for unrivalled global dominance in commodities.
Not having to strap on Rio's $US40 billion in Alcan debt alone is cause for share price celebration on the part of BHP shareholders. That the European regulators were against the deal on competition grounds and chasing BHP for divestments in iron ore and coal was a sideshow.
In this dreadful market too much debt is a very bad thing. Rio had already been bringing forward its assets sales program to retire debt. Even three months ago it made more sense for BHP to go it alone. Buying its own shares made more sense.
The impending collapse of credit-starved mining projects around the world will make tasty pickings for any big miner with cash, shares that trade at a premium and a decent balance sheet. This is good news for BHP.
BHP has capitulated to the inevitable. The costs of such a leviathan global tie-up in a shrinking world economy would have been damaging. And if the deal really makes sense, BHP can come back in a few months or a few years.
Selective welfare
SELL the rumour, buy the fact. Just as they had bounced in the wake of the Bear Stearns bail-out, global sharemarkets have fired up in a relief rally following the Citigroup rescue.
Shares were due for a "bear market rally". Locally, the sharemarket is down 50 per cent from its zenith one year and three weeks ago.
After the biggest one-year fall in more than a century of statistics, another 50 per cent fall next year is highly improbable. For those few brave contrarians left standing then, the 9 per cent yields on blue-chip stocks are surely enticing.
Is it time to buy? As always the question is one of timing. With the looming spectre of a long and deep global recession, however, any benefit is likely to be tempered by more crushing disappointment from economic data, spattered with more corporate casualties.
Despite the prospects for a "suckers rally" into Christmas — and it has to turn, at least for a while, at some point — the Citigroup blow-up reinforces the view that more implosions are in train. It's clear the US Government did not want another Lehman Brothers on its hands.
The "too big to fail" treatment bestowed on Citigroup may well be the ultimate display of "moral hazard". Privatising Wall Street's profits and socialising its losses is anathema to right-wingers and self-respecting socialists alike.
Unfortunately, corporate welfare is the only way. In the case of Citigroup, the market had taken another leg down over the past few days after the speculation the banking behemoth would fall, setting off a cascading effect around the world — especially in credit default swaps.
Derivatives are the great "known unknown" as poet emeritus D.H. Rumsfeld might have put it.
The Citigroup package is not much of a deal for taxpayers. Look at the pricing: Citi shares closed at $US3.76 on Friday ($A6) but the exercise price on the Government warrants is $US10.61. What's more, taxpayers get a tiny
non-controlling stake that does not convert to equity. And there is no commitment on executive pay.
The politicians must be shareholders themselves! Surely, chief executive Vikram Pandit and his merry band of bankers can afford themselves a whacking big Christmas bonus for pulling off this deal. When he kept reassuring the world his bank was in a "very strong" financial position, he really was telling the truth — it's hard to go bust with Uncle Sam standing behind you.
The danger of the US response to these bail-outs lies in the higgledy-piggledy approach by legislators — letting Lehman go under, confiscating some assets, injecting liquidity into others. It sends the signal that the Government is learning on the job. And to be fair, there has been no crisis like this for a long time.
Now, though, General Motors and Ford can hardly be denied a bail-out.
It's tempting to think governments should just let the wobbling corporates collapse. Yet the interlocking nature of the world economy has implications that could not be easily contemplated. Credit markets would freeze and lines of credit would be cut like ribbons as banks clung to cash reserves.
So a bail-out is better than nothing. But markets will wonder at the inconsistency.
Down again
YESTERDAY'S euphoric relief rally coincided with a rash of bad news: downgrades from Harvey Norman, Brambles and Qantas would have been sufficient to send the market lower on a normal day.
After dithering too long over its capital raising, Transfield had to reprice and double its brokers' commission to get its issue away. Rumours over raisings from Commonwealth Bank and QBE continued to swirl. After batting away speculation about job cuts, Macquarie axed 87 staff from its New York office. Hundreds will go from the property operations and sources claim staff cut-backs will proceed piecemeal across the group. It is also believed about 10 per cent of Citigroup's Australian workforce faces the axe.
