Fernando MonteiroRio Tinto Epilogue
June 8th 2009 09:27
Rio Tinto had a hard look at Chinalco and its $US19.5 billion convertible bond proposal and decided to avoid it despite having to pay a break fee of $US195 million. Instead it joined BHP Billiton in the Pilbara, WA, for a 50/50 joint venture to merge explorations of iron ore there. In the process it received from BHP a payment of $US5.8 billion to even the deal.
Rio will go to its shareholders for equity money to retire their $US38 billion debt contracted when purchasing Alcan, an aluminium company, at the top of the market in 2007. Rio will be offering 21 shares for 40 existing ones at a whopping $28.29 – Rio closing share price on Friday was $72.49. These monies plus BHP fee total a recapitalisation amount of $US21 billion.
But, why did Rio Tinto decide to abandon the Chinalco proposal? Firstly, I believe, because Chinalco is a customer, a steel mill, who would be having two seats in the board and a vote on Rio’s iron ore and coal price setting in future rallies. How do you ally the interests of a producer and a customer in the same board?
Secondly, Chinalco made the mistake of misusing its advantageous position and requiring control over too many assets and many conditions. It was trashing Rio and looked grubby.
Thirdly, Chinalco is not a regular commercial entity – it is an extension of the Chinese government and the Chinese communist party and is not guided by the profit motive. So, you could reasonably fear, how would it behave like in different circumstances in the future? Would the Chinese government be directing Rio in the nearby future? This prospect was likely quite realistically considered by the Foreign Investment Review Board.
Finally, Rio shunned Chinalco’s proposal because the convertible bond deal was unfair to existing shareholders who would miss out and see their holdings diluted. This basically means that, since new shares would be offered to Chinalco but not to pre-existing shareholders, their proportion ownership and other financial figures such as Earnings Per Share and Return on Equity would decrease. Even though Rio seemed enticed with the Chinalco proposal in the beginning, it then must have realised it couldn’t wrong its existing shareholders so badly and enter a collision route with them, this much to the disappointment of the Chinese.
Instead, Rio Tinto decided to join BHP Billiton in the Pilbara. The Pilbara is a rich and vast iron ore area in WA and both companies have very large operations there. There is, naturally, scope for use of synergies and economies of scale to make great -- $US10 billion – production savings on a 10 year timeframe.
Last Friday Tom Albanese and Marius Kloppers signed the agreement by which BHP gets the larger chunk of its prior merger attempt proposal back in 2008, and Rio finds a way to raise valuable cash from its shareholders to repay its huge debt while keeping control of the board. Et voilá!
Rio will go to its shareholders for equity money to retire their $US38 billion debt contracted when purchasing Alcan, an aluminium company, at the top of the market in 2007. Rio will be offering 21 shares for 40 existing ones at a whopping $28.29 – Rio closing share price on Friday was $72.49. These monies plus BHP fee total a recapitalisation amount of $US21 billion.
But, why did Rio Tinto decide to abandon the Chinalco proposal? Firstly, I believe, because Chinalco is a customer, a steel mill, who would be having two seats in the board and a vote on Rio’s iron ore and coal price setting in future rallies. How do you ally the interests of a producer and a customer in the same board?
Secondly, Chinalco made the mistake of misusing its advantageous position and requiring control over too many assets and many conditions. It was trashing Rio and looked grubby.
Thirdly, Chinalco is not a regular commercial entity – it is an extension of the Chinese government and the Chinese communist party and is not guided by the profit motive. So, you could reasonably fear, how would it behave like in different circumstances in the future? Would the Chinese government be directing Rio in the nearby future? This prospect was likely quite realistically considered by the Foreign Investment Review Board.
Finally, Rio shunned Chinalco’s proposal because the convertible bond deal was unfair to existing shareholders who would miss out and see their holdings diluted. This basically means that, since new shares would be offered to Chinalco but not to pre-existing shareholders, their proportion ownership and other financial figures such as Earnings Per Share and Return on Equity would decrease. Even though Rio seemed enticed with the Chinalco proposal in the beginning, it then must have realised it couldn’t wrong its existing shareholders so badly and enter a collision route with them, this much to the disappointment of the Chinese.
Instead, Rio Tinto decided to join BHP Billiton in the Pilbara. The Pilbara is a rich and vast iron ore area in WA and both companies have very large operations there. There is, naturally, scope for use of synergies and economies of scale to make great -- $US10 billion – production savings on a 10 year timeframe.
Last Friday Tom Albanese and Marius Kloppers signed the agreement by which BHP gets the larger chunk of its prior merger attempt proposal back in 2008, and Rio finds a way to raise valuable cash from its shareholders to repay its huge debt while keeping control of the board. Et voilá!
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