China Raids Rio

The Age

Saturday February 2, 2008

Barry FitzGerald, Resources Editor

BHP Billiton's plan to create a $380 billion mining colossus through the takeover of a reluctant Rio Tinto has been thrown into disarray following the dramatic eleventh-hour intervention of Aluminum Corp of China and US aluminium giant Alcoa.

The aluminium pair last night revealed in the London market that they had teamed to buy a 12% stake in Rio's London listed shares, giving it an estimated 9% of the dual-listed company. While the stake is big enough to block BHP's bid plans for Rio, the Chinalco/Alcoa consortium has said it does not intend to make its own offer for Rio, but reserved the right to do so.

That was taken to mean it only has eyes for Rio's 4.3 million tonnes a year aluminium business, the world's biggest since Rio's acquisition of Canadian producer Alcan last year with a $US38 billion bid that blew an earlier competing offer from Alcoa out of the water.

Analysts said the Chinalco/Alcoa hold on a 12% Rio stake was designed to force BHP into a pre-bid negotiation in which Rio's aluminium business would be carved out, leaving BHP with the still major prize of Rio's world-class iron ore, copper and coal assets.

BusinessDay yesterday reported that there had been rumours in the London market that the so-called "China solution" was being worked on. It is a solution to China's fears that a BHP/Rio combination would exert additional supply and price control over the commodities China needs for its rapid industrialisation and urbanisation - aluminium, copper and iron ore.

Analysts said the apparent non-involvement of a Chinese steel producer or copper processor in the raid suggested that Chinalco was operating off its own bat rather than taking directions from Beijing. As far as Alcoa was concerned, analysts saw its involvement as a bold attempt to regain its status as the world's dominant aluminium producer after its slide in recent years.

Alcoa chairman Alain Belda said: "We have long believed that Rio has a world-class portfolio of assets and is very well positioned to prosper. This investment, made in partnership with Chinalco, allows us to mutually benefit from developments in the sector."

Investment banker Lehman Brothers said it had bought the shares for #60 a share - a 21% premium to Rio's London close on Thursday - from unnamed shareholders. The total cost was #7 billion ($A15.3 billion) - making it a huge sharemarket raid.

Rio last night said that investment by Chinalco/Alcoa "reinforced our position that BHP has undervalued Rio" with its proposed 3-for-1 offer - one that BHP has until Wednesday to make live or walk away from for at least six months. BHP last night had no comment. o

The price Chinalco/Alcoa paid of about $133 a Rio share compares with Rio's closing price yesterday of $127.31.

More drastically for BHP is that the price paid represents a 15% premium on the current value of BHP's proposed 3-for-1 offer. That equates to a whopping $19.2 billion.

The dramatic intervention of the Chinese and Americans came as BHP's board earlier wound up its Melbourne deliberations on where to go next with its plan to become one of the world's biggest companies - by taking out Rio, its old enemy in the decades-long competition for the global investment dollar.

Having canvassed BHP's options with the board at head office in Lonsdale Street over the past two days, the group's intensely focused chief executive, Marius Kloppers, now has to ponder the implications of the the fresh competition as he sets off for London with BHP's still-secret board plan - one that Chinalco/Alcoa have effectively torn up. The board decision he carries won't remain a secret for long.

Kloppers' London visit, ostensibly to spearhead the release on Wednesday of BHP's December half-year profit report, neatly coincides with the deadline set by Britain's Takeover Panel under its "put up or shut up" rules for BHP to let the rest of world in on what its next move will be in the Rio shoot-out.

BHP has several options in what is a momentous decision, even for a group that can already boast it is the world's No. 1 miner. BHP could walk away from its spurned 3-for-1 scrip proposal - first made public on November 8 - knowing it cannot come back with another offer under the British takeover rules for six months.

Up until the intervention of Chinalco/Alcoa, that was considered the least likely course of action, even if taking an enforced six-month holiday from its pursuit of Rio could have appealed to those BHP directors nervous about the shakedown in global credit and equity markets.

The shakedown has meant that the view of BHP's long-serving chairman, career banker and a fan of national champions across all industry sectors, Don Argus, loomed large in this week's deliberations by the BHP board.

He knows, better than most, whether the time is right for BHP to be taking on the $US70 billion ($A78 billion) in debt that its proposal entails because of the need to refinance Rio's debt from the Alcan acquisition, and to fund the planned capital buyback sweetener for what would be BHP's enlarged shareholder base. But does he want BHP to take on the might of a Chinalco/Alcoa combination?

The market is betting that, after stalking Rio for more than 10 years, BHP is not about let go of its ambition to create a "super-major" - one that investors will have to have as a "core investment holding".

In BHP's view, there is no other combination as compelling. It would mean more production, at a faster rate, to keep customers happy. The combination would also deliver enhanced growth options and combination synergies quantified at $US3.7 billion. There is no denying all that from a Rio perspective. It's just that, at the moment, there is no proposal on the table and, if BHP persists with a 3-for-1 tilt, there is no point talking. The acquisition of a a blocking stake by Chinalco/Alcoa has made sure of that.

As tough as Argus is said to be in all matters commercial, he has a worthy adversary in Rio chairman Paul Skinner, a Cambridge law graduate and former big oil man with Shell. Skinner has the ear of the critical London market.

An alternative option for BHP - and the market favourite until yesterday's intervention - was for it to turn its 3-for-1 proposal into a formal offer with a view to renewing the value debate with Rio.

That would have left open the option to increase the offer later to secure a Rio endorsement and its help in securing government and regulatory approvals.

BHP has had limited success to date in the value debate at 3-for-1, despite the best efforts of Kloppers, with Rio shares generally trading in the 3.2-for-1 to 3.4-for-1 ratio range.

Under the threat of what it sees as a low-ball takeover bid rather than a genuine merger attempt, Rio has thrown off its usual aversion to spruiking its relative value.

That job has fallen to Rio managing director Tom Albanese, the New Jersey boy with a well-developed implicit smile capability.

He set the benchmark early in Rio's fightback with his quip that the proposed 3-for-1 offer was "two ballparks away" from Rio's true value. He got a ringing endorsement of that view last night.

The writer owns BHP shares.

© 2008 The Age

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