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Source: Reuters -
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Global miner Rio Tinto dumped plans for a $19.5 billion tie-up
with China's Chinalco and agreed to set up an iron ore joint
venture with rival BHP Billiton and sell new shares to slash
debt.
The new plan represents a victory for Rio shareholders who had
opposed the deal with Chinalco, arguing it favoured the Chinese
state firm and could give China greater influence over pricing of
key commodities such as iron ore.
Shares in Rio jumped as much as 13% to a 7-month high of A$75.75
($95.40NZ), nearly triple the A$28.29 ($35.60NZ) rights issue
price, while BHP shares rose 10% to A$38.60 ($48.60NZ).
Rio had lined up the deal with Chinalco in February as it was
desperate to pay off half its $38 billion in debt as it battled
tight credit markets and a commodity price slump and had failed to
sell assets to raise cash.
But as equity and commodity markets rallied and credit markets
eased, options opened up for Rio Tinto, and shareholders stepped up
pressure on it to revise the Chinalco deal.
"We were not supporters of the Chinalco transaction. We're happy to
see this alternative approach to solving Rio's issues with its
debt," said Ross Barker, managing director of Australian Foundation
Investment Co, Rio Tinto's sixth-largest shareholder in Australia
and a BHP shareholder.
"A deal like this was really essential from Rio's point of view.
And it's a good deal for BHP," he said.
Fifth-largest rights offer
Rio and BHP, the world's second- and third-largest iron ore miners,
agreed to combine their operations into a 50-50 joint venture,
generating savings of at least $10 billion.
BHP, which dropped a bid to buy Rio last year, will pay Rio Tinto
$5.8 billion to take its equity interest in the venture to 50%, but
it stressed the agreement was non-binding at this stage.
"This deal has been 10 years in the making and well worth the
wait," BHP Chief Executive Marius Kloppers said.
To cut debt, Rio said it was raising $15.2 billion through a
21-for-40 rights offer, the fifth-largest rights issue on
record.
Rio and BHP agreed to keep their iron ore marketing separate, a key
factor designed to win approval from competition regulators,
especially the European Commission, which last year raised concerns
about BHP's proposed takeover of Rio due to the impact on iron ore
markets.
Chinalco said it regretted Rio's decision after it had worked hard
to try to revise the deal to reflect changed market conditions as
well as shareholders' and regulators' concerns.
"As a result, we are very disappointed with this outcome," Chinalco
President Xiong said in a statement.
"Rio has effectively been talking to BHP behind Chinalco's back and
Chinalco is entitled to feel like a two-timed lover this morning,"
said Paul Bartholomew at Steel Business Briefing in Shanghai. "This
is a big slap in the face for China, BHP and Rio's biggest iron ore
consumer."
Massive savings
"My initial reaction is that it will be overwhelmingly positive for
both companies because of the cost savings (and) the synergies,"
said Michael Bentley, resources portfolio manager at Northward
Capital.
The cost of insuring Rio Tinto's debt fell by more than a third,
with the spread on its credit default swaps (CDS) narrowing to
around 190 basis points from 290 bp.
"We consider these initiatives are a superior outcome for Rio's
credit quality as opposed to the Chinalco deal," Nomura
International said, adding it was much better Rio was selling
equity instead of convertible bonds, maintaining greater ownership
of its assets, gaining joint venture savings and would not have a
conflict with a major customer as a big shareholder.
The prospects for Chinalco were less clear.
Chinalco vice president Lu Youqing said the firm had not decided
its next step and had not decided whether to participate in the
rights offer.
"This is a big thing and is not determined by a single person," Lu
told Reuters, adding the decision not to revise the deal with Rio
Tinto was made by both sides.
BHP CEO Kloppers and his Rio Tinto counterpart said they did not
expect their joint venture to hurt ties with the Chinese.
"We have an excellent relationship with Chinalco, and I remain very
positive about the potential for future collaboration," Rio CEO Tom
Albanese said.
Under the deal agreed in February, Chinalco would have paid $12.3
billion for stakes in Rio's key iron ore, copper and aluminium
assets and $7.2 billion for convertible notes that would have
doubled its equity stake in Rio to 18 percent.
The prospects of winning approval from the Australian Competition
and Consumer Commission (ACCC) for the joint venture are good, as
the regulator last year did not seek to block BHP's proposed
takeover of all of Rio.
"On the face of it, given that it was approved previously, there
would have to be a compelling argument as to why this wouldn't be
(approved) by the ACCC," said Trade Minister Simon Crean.
BHP launched a 3.4-for-1 share swap to take over Rio in February
2008, which Rio rejected saying it vastly undervalued the firm and
its prospects. BHP dropped the deal last November after commodity
markets collapsed.
