THE biggest merger in Australian business history is dead. The board of Rio Tinto is preparing to abandon a $120 billion iron ore deal with the rival mining giant BHP Billiton in the Pilbara.

The aborted joint venture, which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago, was expected to meet opposition from European and Chinese regulators concerned about the effect of the new iron ore stranglehold on global steel prices.

In early trading on Wednesday, both BHP Billiton and Rio Tinto shares rose, out-pacing the gains of the broader market. Rio shares were up as much as $1.76, or 2.3 per cent, to $78.76, while BHP shares added as much as 75 cents, or 1.9 per cent, to $40.25.

Rio is walking away, it seems, because of improving financial fortunes, pressure from shareholders, and the conclusion that the terms of the deal favoured BHP. Sources close to the Rio board confirmed that Rio was preparing to tell BHP of its decision yesterday.

The chairman of Rio, Jan du Plessis, had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.

”They can’t object to that,” Mr du Plessis said. ”That’s kind of us stating our investment preference. They will no doubt have their own measurements and I think that’s fine.

”I would suggest though, in both our formal and our informal messaging … I would not want us to spread negative messages about BHP. I’m not sure it serves a purpose. I’m not sure it will reflect well on us.”

Although the market had speculated about the failure of the Pilbara deal since the Herald foreshadowed its collapse in August, there had been no acknowledgement from either party that it was in trouble. Now Rio, having canvassed the opinion of its largest investors, is looking to save face.

”I think with regard to the [joint venture] and why it didn’t succeed … we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn’t possible,” Mr du Plessis told directors on Monday.

”I think we have a positive message we should spread … I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I’m not sure that gets us anywhere.”

The Herald understands other directors agreed with the positive public strategy.

One, Rod Eddington, agreed that excessive criticism of BHP would not serve Rio’s interest. ”In fact the opposite, Jan. I think it blows up in our face,” he said.

Another director, Mike Fitzpatrick, brought up discussion of ”plan B”, a fallback plan to appease investment markets that involved sharing infrastructure and facilities.

The Pilbara tie-up required the approval of regulators and BHP and Rio shareholders. It was this obstacle that finally prompted the Rio board to move. The company, whose iron ore production is about twice the size of BHP’s, stood to gain a $5.8 billion ”equalisation payment” from BHP. This was no longer viewed by the Rio shareholders and board as adequate. When the deal was first cut last year, Rio was heavily in debt and had fallen foul of its Chinese customers thanks to a falling out with Chinalco and the subsequent public relations disaster of the arrest of its employee, Stern Hu, in China on bribery and spying charges.

Rio has since cut its debt by almost 40 per cent, has struck a $12 billion iron ore deal in West Africa with Chinalco, and its share price is strong.