Apocryphal or otherwise, the comment is attributed to Chinese premier Wen Jiabao : “I don’t know a lot of things, but what I do know is that this deal is not good for me.”
It was a response to news, in November, that BHP Billiton had tabled takeover proposals to rival miner Rio Tinto.
On Friday, the Chinese authorities took their most confident – and costly – corporate step abroad in order to block those proposals, spending about $14bn in a tender offer for 12 per cent of Rio. For bankers in the West, global M&A strategising may never be the same again.
According to FT Alphaville’s best-placed sources, here’s how China was goaded into action.
BHP’s original move on Rio caught the Chinese by surprise. Suddenly it was confronted with a combined mining giant with a stranglehold over supply, particularly iron ore. Officials at the very highest level in Beijing sat down and decided what they should do. They concluded:
- China needed a global resources strategy; its well publicised ambitions in Africa were simply insufficient.
- It had a severe lack of skills and experience in terms of managing global mining companies; and
- it had not had a happy time politically when trying to acquire resources and energy abroad.
In short, while the Chinese might have the money, they did not consider themselves to have the wherewithal to take Rio over themselves. Yet the country was faced with a threat it could not ignore. This was an “Australian solution” – a move to create a super-major that would dominate mining across the planet.
The Chinese met with Rio executives and are understood to have offered to buy a 25 per cent stake in the company – a naked plan to block BHP. Rio’s board responded by saying that while they understood China’s fears and frustrations, their job was maximising shareholder value; if China wanted to control Rio’s ownership it would have to bid for the whole company.
But the hoards of Western bankers, who by this time had descended on Beijing, had an alternative – and rather elegant – compromise. Buying 12 per cent through a tender offer pitched at a substantial premium would achieve a number of things:
- It would hike the floor for any formal BHP offer
- It would force BHP to offer cash
- Loose shareholders on Rio’s register would be mopped up; longer term holders would get a partial cash payout
- Bringing Alcoa into the deal as a minority participant would signal US endorsement of the Australian move being blocked.
If and when BHP withdraw from the fray, the Chinese are said to be more than ready to come back and buy another 12 per cent, sweeping up those remaining shareholders still hoping for a full bid.
Says one financier: “The Chinese want an independent Rio, with the company run by the current board and existing management, with whom they can do future deals. It is impossible to overstate just how angry they are with BHP.”
Rio on Friday was telling newswires that it was only told about Chinalco’s tender offer just before the news was broadcast to the markets.
Its executives will have to get to know this man, Xiao Yaqing, who runs the company “under the care of central party committee and the support of various ministries, native government and party committees,” according to Chinalco’s website. 
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