Iron ore: Australians 1 Chinese 0
(From Acquisitions Monthly)
Rio Tintoâ€™s agreement to scrap its refinancing deal with Chinese shareholder Chinalco, join its iron interests in Australia with arch rival BHP Billiton and raise $15 billion from investors is a remarkable coup, solving many of the minerâ€™s problems.
Most importantly it allows the company to halve its $40 billion debts, which doubled to that level when chief executive Tom Albanese bought Canadian aluminum company Alcan for cash at the top of the commodity cycle in mid-2007.
After the cycle turned, and prices fell, exacerbated by the global economic downturn, Rio and Albaneseâ€™s position looked vulnerable. BHP had earlier tried to exploit this, proposing a mega 3.4-for-1 all share offer.
BHP said that bid, suggested in early 2008, would only be made if regulatory authorities around the world approved. That was never that likely. However, there should be less resistance to this morningâ€™s proposals by the duo, apart from the usurped Chinese.
In order to combine their iron ore capabilities in Western Australia in a 50:50 joint venture BHP will pay Rio $5.8 billion, from its existing cash resources, to lift its share from 45 percent to 50 percent. That values the venture at $116 billion. Ten billion dollars of synergies are envisaged.
That cash fillip will help Rio in particular. Refinancing its Alcan-related debt was the trigger that pushed Rio into Chinalcoâ€™s hands in the first place. The Chinese investor initially took a 12 percent stake in Rio when the latter was first approached by BHP.
Its aim was to try and prevent such a dominant iron ore supplier being created. Ironically, the worst has now come to pass for the Chinese and such a force looks likely to be formed via the BHP Rio joint venture.
For Western democrats, in a week when the world remembers the 20th anniversary of the Tianamen Square protests, that is cheering news. The Chinalco option never looked that attractive once Rio, along with other miners and most equities rallied in March.
Rioâ€™s share price has more than doubled from its low point in January. That made the alternative option, of raising the necessary cash to refinance the debt via a rights issue, a far cheaper and better option.