China ups the ante for Rio Tinto

Chinalco and Alcoa join forces to buy a 12% stake in Rio Tinto for $14 billion, taking both rival bidder BHP and the target by surprise, in a move analysts have called ingenious.
The Aluminum Corporation of China (Chinalco) and US aluminium producer Alcoa bought 12% of the outstanding shares of UK-listed Rio Tinto on Friday, February 1. At an outlay of $14 billion, this is the most audacious move from China Inc thus far.

Shares were purchased from a number of large investors in Rio Tinto at ú60 ($118) per share, around a 20% premium to Rio TintoÆs closing price on Thursday, January 31.

The Chinalco-Alcoa stake represents a 9% holding in the combined Rio Tinto, which has 78% of its shares listed in London and the balance listed in Australia.

The move signals clearly to onlookers that China is willing to bet big stakes and enter the fray in tricky situations. ChinalcoÆs bid is fully supported by China Inc with China Development Bank arranging financing for the bid.

ôOur acquisition of a significant strategic stake in Rio Tinto underlines ChinalcoÆs determination to increase and diversify its exposure to the sector and to be well positioned within this changing industry,ö says Chinalco president Xiao Yaqing.

Chinalco is one of the largest diversified metals and mining companies in China. For fiscal 2007 it expects to post sales of $18.3 billion and profits of around $3 billion. Chinalco owns a 38.6% stake in NYSE-, HK- and Shanghai-listed Chalco which had revenues of over $8 billion in 2006.

The shares in Rio Tinto have been acquired by Shining Prospect, a Singapore-based entity wholly owned by Chinalco, in which Alcoa has subscribed to $1.2 billion of convertibles. Lehman Brothers and the China International Capital Corp are advising Chinalco and Shining Prospect on the bid.

Rio Tinto was founded in 1873 and is the worldÆs third-largest diversified mineral group. It is also a leading aluminium producer following its acquisition in 2007 of Alcan, Canada.

Rio Tinto has been in play since November when BHP Billiton announced a bid for the company, offering three BHP shares for every Rio Tinto share. On November 8 the board of Rio Tinto recommended shareholders reject BHPÆs offer on grounds that ôit significantly undervalues Rio Tinto and its prospectsö.

Rio Tinto is being advised by Credit Suisse, Deutsche Bank, JPMorgan Cazenove, Macquarie, Morgan Stanley and NM Rothschild.

Chinalco has timed its move well as February 6 is the last date set by the UK Takeover Panel for BHP to table a revised offer for Rio Tinto.

Natural resources firms are being forced to rethink their strategies. Asian companies, specifically from China and India, are turning acquirer as they seek to secure access to a steady supply of raw materials for the future demand of their growing economies and populations. But the targets are not standing still and many of them are exploring mergers as they are driven to consolidate both by the ability of larger, combined entities to extract synergies/economies of scale and to command greater pricing power.

It is precisely this pricing power that can prove very costly for emerging markets which are currently the largest customers for natural resources.

Rio Tinto on February 1 noted the announcement by Chinalco and Alcoa. "This unsolicited development, of which we had no prior notice, reinforces our view of the long-term value of Rio Tinto,ö says chairman Paul Skinner. ôIn line with our long-standing strategy, we shall continue to focus on operating our many world class assets to maximise value and prospects for all shareholders."

BHP is being advised by Citi, Goldman Sachs, Gresham Advisory Partners, Merrill Lynch and UBS. Barclays, BNP Paribas, Citi, Goldman Sachs, HSBC, Santander and UBS are arranging financing for the bid.

Analysts reacted positively to the move by Chinalco-Alcoa. The Chinese company has packaged its bid well by bringing Alcoa to the table alongside itself. But it is not immediately clear what the end game is. A bid for all of Rio Tinto will be a large commitment of resources, even for China with its large surpluses.

But as a blocking strategy, the move is a master stroke.

The price Chinalco has paid has set a benchmark of sorts for a valuation of Rio Tinto. BHPÆs offer translates to a lower per share price and also does not offer any cash to shareholders. If BHP cannot put forward a revised bid by the February 6 deadline, it is forced to wait another six months before coming back to the table.

It is also possible that Chinalco is hoping for a division of the spoils. Analysts have speculated that BHP might consider selling some Rio Tinto assets and Chinalco is now best-positioned for first right of refusal on any such disposals.

Shareholders of all parties involved responded favourably to the news on Friday. Rio Tinto shares gained 13% to close at ú56. Alcoa gained 3.6% to $34.28. BHP gained 10% to ú16.
¬ Haymarket Media Limited. All rights reserved.
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