It’s official: Chinese state-owned aluminium group Chinalco on Thursday sealed the biggest overseas investment by a Chinese company, agreeing to invest $19.5bn in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts.
Under the deal, Chinalco will spend $12.3bn acquiring stakes of up to 50 per cent in nine of Rio’s mining assets.
It will also buy $7.2bn of convertible bonds that will eventually double its stake to 18 per cent from the current 9 per cent when they convert to shares.
Needless to say, the reaction in Australia and among analysts and shareholders, has been resoundingly negative.
Matthew Stevens in The Australian sums it up thus:
If Rio Tinto reckons its widely anticipated $20bn “strategic alliance” with Chinalco represents an end to a credibility crisis created by its ill-fated Alcan acquisition, it can start thinking again…confirmation of a deal done will probably sound the starter’s pistol for a whole new set of challenges to the reputation-scarred miner.
That Rio’s unprecedented sell-down has been forced by failure and will be the result of a private sale rather than an industry-wide auction will probably trigger further disruptive debate about the commercial capacity of Rio’s senior management and boardroom leadership.
Already, the deal has set alarm bells ringing – and no doubt prompted this week’s announcement by Australia’s Treasurer Wayne Swan that the government would tighten foreign ownership laws with immediate effect by treating convertible debt as if it were equity. That follows moves by Canberra last year to tighten scrutiny of investments by foreign state-owned entities to ensure they do not come with political or strategic strings.
Is there any such deal that China would make to secure strategic resources that would not come with political and strategic strings attached?
Indeed, notes BusinessSpectator’s Alan Kohler in a post called “A stinker of a deal for Rio”, the official Chinese financial newspaper, Securities Times, carried a story recently that said Chinalco’s move on Rio was supported in Beijing because it would “contain and control pricing power monopolised by multinational companies”.
Already, many analysts predict Rio will have a hard time winning official approval for Chinalco to raise its stake above 15 per cent. As Bloomberg notes, Australia limits ownership under the Foreign Investment Review Board regime to 15 per cent. Chinalco got approval from Swan in August to raise its stake in Rio to 11 per cent. But the sale of more stock to Chinalco may well be blocked.
In Kohler’s view, Rio shareholders and the Rudd government “should knock back Rio’s capitulation to the Chinese”:
If the details reported so far are correct, the deal looks to be a stinker – for the company and for Australia.
But well before the deal became official, internal turmoil at Rio over the proposed Chinalco deal led to the abrupt departure of Jim Leng as chairman-designate – barely more than three weeks after his appointment. Leng, former deputy chairman of India’s Tata Steel, apparently fell out with Tom Albanese, chief executive, over the idea of hocking a big chunk of the company to the Chinese. Leng reportedly favoured a large rights issue as the solution to Rio’s debt problems – an option, it has to be said, that would also hold many pitfalls.
Even before the boardroom bust-up, as FT Alphaville notes, Rio’s shareholders and analysts were already questioning the merits of a deal that would see Rio sell some of its best assets to Chinalco and the Chinese group double its 9 per cent holding.
Those questions grew into threats by Wednesday when, as the FT reports, some of Rio’s top UK shareholders threatened to vote against the deal if it doesn’t give them the right to equal participation in the bond issue.
Albanese should have listened to Leng, says Kohler, “the man who spent three weeks as chairman arguing against the deal before quitting last week because he could neither persuade Albanese and a majority of the board, nor support the plan”.
His view was that a financial problem should have a financial solution, not a strategic one. Leng’s right: cash panics are not a good time to make major, company-changing decisions, if it can be avoided.
Then there is the BHP Billiton factor.The Times, in what is being seen as a bit of a kite-flyer on Thursday, reports that BHP is considering whether to “gatecrash” Rio’s deal with Chinalco, to counter-bid for some of the mine assets.
However, as Kohler notes, BHP is cashed-up and a known keen buyer of Rio assets.
Obviously the humiliation of having turned down BHP’s takeover offer and then going back cap in hand to Marius Kloppers [BHP chief executive] for cash was too great.
But in snubbing its bigger rival, Rio could well be cutting off its head to spite its body:
Rio is not only selling assets at the bottom of the cycle, having overpaid for Alcan at the top, it is also giving up a takeover premium and selling effective control to a customer.
And although the deal has been negotiated with Xiao Yaqing, the entrepreneurial head of Chinalco, there is no doubt that Rio is hopping into bed with the government of China – a state that has a keen interest in keeping commodity prices down, especially iron ore.
Why not turn to existing shareholders? That is a subject of intense debate among Rio’s big and rather irritated circle of shareholders. One reason is possibly to get its hands on an assured amount of cash – quickly. Before the end of September, Rio needs serious cash to repay A$8bn of its A$37bn Alcan debt mountain by October.
And finally, on the matter of the boys at Chinalco, the FT’s People column has some interesting detail on Thursday about the new chairman at Chinalco, Xiong Weiping, who is taking over from Xiao Yaqing as he moves onto bigger and better things to a role within the upper echelons of government – presumably a reward for a deal well done.
Related links:
A pioneering strategic relationship – FT Alphaville
Rio Tinto’s new masters – FT Alphaville
So Leng at Rio – FT Alphaville
Rio investors wary of Chinalco tie-up – FT
A stinker of a deal for Rio – BusinessSpectator
Rio seems to have had eyes only for Chinalco – The Australian