The year-long ban BHP Billiton has had on revisiting a takeover of rival miner Rio Tinto will soon end, but it seems as if the moment has passed. Liberum and Investec said earlier this week that most of the synergies were captured anyway by the duo’s iron-ore joint venture.  If regulators nix that deal, analysts say a full takeover could be back on — but how that would pass muster if a JV doesn’t is not clear. On Friday, Credit Suisse joined the chorus of disapproval, saying a takeover would cut BHP’s return on equity (ROE) in half. From the CS note:

“We have re-run the numbers on an all scrip BHP Billiton takeover of Rio Tinto at a 30% premium (2.3 BHP shares for each RIO share). We see such a deal as materially EPS dilutive (by 12% even after year 3) and would significantly decrease BHP’s return on equity (from 25% to 12%).

“We do not see BHP making another takeover offer for RIO because: (i) The iron ore JV should capture many of the synergy benefits expected from the possible merger. (ii) If the iron ore JV fails on account of not passing regulatory hurdles similarly then we do not see a takeover receiving regulatory passage. (iii) We do not foresee shareholder support for the deal (and any such deal would use BHP script) with the potential EPS dilution and ROE erosion significant. (iv) Non-availability of sufficient credit facilities.

“We see a reinstatement of the buyback as a more preferable option for BHP shareholders than another tilt at RIO. A buyback of US$18bn in FY11 would be 7% EPS accretive and return gearing to a more normal level of 25% (BHP is debt free by end FY11 on our current forecasts).”

Chinese demand for industrial commodities has long been the defining variable in establishing global market prices for everything from alumina to zinc. The modern engine of global manufacturing has made great strides toward embracing freer markets, but its deep roots in its command economy have clouded global markets’ ability to gauge demand. If Chinese allegations are true that Rio Tinto spied and adopted such unsavory tactics as bribery to gather market intelligence, the actions of the western company could be considered an attempt to attune its business practices to the local climate.

Share of Rio Tinto were sagging on Monday after China stepped up its spying allegations. China’s state secrets agency said on its website over the weekend that Rio Tinto had spied on Chinese steel mills for six years, resulting in the mills overpaying $102 billion for iron ore, Rio Tinto’s biggest earner. Australia’s Foreign Ministry says there’s nothing new in the latest allegations. Rio declined to comment on the accusations, which followed China’s detention a month ago of four Rio employees in Shanghai, including Australian Stern Hu, on suspicion of stealing state secrets.

When considering China’s motivation in this political drama, the brutal realities of the marketplace are also a key consideration. “Most observers see a link between the detentions and Chinalco’s failed attempt to up its Rio stake,”  according to Reuters columnist John Kemp. “While a direct link is hard to prove, there is no doubt the allegations have been prompted by high-level frustration at the way the annual ore negotiations have been conducted.”

Xstrata is different from most other major mining companies. Rather than being a long established group with strong links to a particular country, such as Australia for Rio and BHP, South Africa for Anglo American, or Brazil for Vale, it is a relative upstart with few ties to any particular territory, aside from its tax inspired domicile, Switzerland.

The group’s culture might seem innocuous but it is important, particularly when Xstrata has this week proposed a “merger of equals” with South African stalwart Anglo American. Unlike many of its rivals, Xstrata’s raison d’etre is doing deals, led by raucous chief executive Mick Davis.

The company floated in March 2002 with an initial value of £2 billion. Since then, a number of transformational acquisitions such as the $19 billion purchase of Falconbridge, and the recovery in global commodity prices, has meant the group is now valued at £20 billion. At its record high last year, when it tried to buy platinum producer Lonmin, it was worth £67 billion.

Xstrata’s strength is that it has always been much closer to its customers than other, perhaps more parochial groups keener on looking after their employees. The presence of trading entity Glencore on its shareholder register, with a third of Xstrata’s stock, is testament to this.

Davis’s true loyalty showed earlier this year when he effectively enabled Glencore to retain this stake, by funding its participation in January’s £4.1 billion rights issue, via a side deal selling certain Glencore coal assets in Colombia to the group for $2 billion.

The current tilt at Anglo American, now worth £24 billion, looks a deal too far for Xstrata. For one, Glencore looks likely to be diluted down to a sixth of the combined group, as the proposal currently lies. Secondly, Anglo American will vigorously defend its independence, as it is already showing, helped by implicit South African support.

Glencore must have approved Xstrata’s move but that in effect puts Xstrata in play, if it is indeed willing to effectively relinquish control. That is highly significant. The end result might either see Anglo American making a “pacman” offer for Xstrata to defend itself or else encourage Vale, which has approached Xstrata before, to make a play for it.

Ultimately Xstrata, with few political connections, looks the more vulnerable participant in this process.

Just when you thought M&A was dead, along comes the $68bn “merger of equals” proposal between Anglo-Swiss mining giant Xstrata and rival Anglo American.

Xstrata confirmed over the weekend that its chief executive Mick Davis recently wrote to Anglo American’s outgoing chairman Sir Mark Moody-Stuart about doing a deal. On the back of that, Anglo’s shares surged as much as 12.4 percent before falling back during Monday’s trading.  Spurred on by uncertainty in the global economy, a need for substantial cost-savings, the recent merger of Rio Tinto’s iron ore business with that of BHP Billiton’s – and a belief that Xstrata must double its size to catch its closest competitor, Rio Tinto – and you have the rationale behind Davis’s thinking.

“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth,” Xstrata said in a statement. According to Citi analysts, the deal “makes financial and strategic sense, and could create synergies of up to $750m.  The combined entity would be a global leader in base metals, platinum, ferrochrome and coal”.

Put another way, the new company would be number one in zinc and platinum production, as well as thermal export coal and ferrochrome.  It would be number two in copper, number four in nickel, and number five in iron ore and coke. Even though metal prices have made major gains for the year to-date, mainly driven by robust Chinese industrial activity and restocking, Chinese imports of those commodities are slowing.  Xstrata sees a tie-up with Anglo American as a defensive move.

While some of Xstrata’s major shareholders – including Glencore, BlackRock and Capital Group – are said to be behind such a merger, Xstrata’s financial advisers, Deutsche Bank and JPMorgan Cazenove, will be facing substantial difficulties to close a deal. Already, Anglo American’s advisers, Goldman Sachs and UBS, are mounting their client’s defence.  Apparently, Anglo’s assets are better quality and have more durability.  “Why would you want to dilute that portfolio with lower value assets?” an informed source told Reuters.

There would also be a clash of cultures between the two mining groups.  Anglo American’s chief executive Cynthia Carroll is understood to have a more command-and-control style, while Davis believes in more self-autonomy of business units.  Indeed, Carroll has so far not been persuaded by Davis’s overtures since Xstrata recapitalised its balance sheet with a $5.9 billion rights issue in March. “Anglo’s reluctance to do a deal and the stark difference in corporate cultures make a tie-up a possibility rather than a probability, in our view,” Citi stated.

It is also unlikely that Xstrata could go hostile since that would rankle the South African government, which has a 5.5 percent stake in Anglo through the Public Investment Corporation.

As for Brazil’s Vale, which has been mooted as an alternative partner for Anglo American or Xstrata, it would be financially stretched.  It has $9bn of net debt: gearing that up further would “seriously risk” its investment grade rating.  Paper financing would be complicated by Vale’s dual structure of ordinary and preferred shares.

If the global recession wasn’t enough, with its idled auto factories and demand dwindling from the construction to the ship-building industries, the world’s steelmakers are facing the kind of consolidation that could well be a transformative event for the business.

Coal giant Xstrata aims to buy Anglo American for $68 billion in a tie-up between two of the biggest iron ore suppliers, creating the second-largest producer of steel-making coals. The move follows joint-venture plans from ore suppliers BHP Billiton and Rio Tinto and is seen as a big threat to steelmakers’ ability to exert any control over falling prices. Expect plenty of opposition from governments about too much pricing power residing in too few hands.

But the deal has other obstacles as well. Xstrata is offering effectively no premium to Anglo shareholders, which is producing loud squawks of outrage from investors. Perhaps by the time this one gets ironed out, the global recovery will be in full swing.

The Xstrata/Anglo deal is probalby going to be all the rage at the annual Steel Survival Strategies conference, which kicks off in New York on Tuesday with executives from U.S. Steel, ArcelorMittal and AK Stee expected to speak.

This week’s Thomson Reuters “Investment Banking Scorecard” is out. Here are the highlights:

“BHP/Rio Tinto Deal Changes Global M&A Landscape

“The announcement of a joint venture between Australia’s BHP Billiton and domestic rival Rio Tinto last Friday ranks as the second largest worldwide deal this year and may prove fruitful for some investment banks.  Advisors Gresham Partners, Lazard, Morgan Stanley, and Goldman Sachs will advise on the deal, translating to valuable deal activity in a year where M&A volume is down 43%.  Earlier this year, Chinalco announced a multi-continent $19 billion investment in Rio Tinto, which was withdrawn as a result of the new mega-deal.  Of the seven banks on the initial Chinalco deal, only Morgan Stanley, ranked first for worldwide M&A year-to-date, secured a role on the BHP deal.

“Real Estate Equity Capital Markets Activity up 85%

“Equity capital markets offerings from real estate issuers have soared so far in 2009, while activity in the M&A, DCM, and loans segments remains down from 2008.  Real estate ECM volume is up 85% over last year at $36.5 billion.  Activity in the Americas accounts for 44.7% of the total volume across the sector, followed by Asia (including Japan) with 36.6% and Europe with 18.4% share of the market.

“The recent follow-on offering from real estate investment trust Boston Properties for $862.5 million contributed to this total.

“Rising Interest Rates Slow Investment Grade Debt

“With rising US interest rates concerning investors, investment grade debt volume so far this week totals just $31.4 billion, the slowest weekly volume in nearly two months.  For the week, European activity accounted for 53% of volume, 19% from issuers in the Americas, 16% from Asia, and 12% from Japan.

Several large Asian and Japanese corporate deals this week contributed to a booming year for debt capital markets in Asia, where volume totals $172.5 billion year-to-date 2009, a 45% increase in over 2008.”

(From Acquisitions Monthly)

Rio Tinto’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 miner’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 Albanese’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 morning’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 Chinalco’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.

Rio’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.

British department stores group Debenhams Chief Executive Rob Templeman told Reuters the company will price its 323 million pound rights issue at a modest discount, while Chinese state-owned metals firm Chinalco may revise its planned $19.5 billion investment in miner Rio Tinto before a June 14 deadline, according to two sources close to the deal we talked to.

In the U.S., American International Group (AIG) is in talks with three bidding groups for International Lease Finance Corp., but a sale is complex as the parties have to deal with the aircraft leasing unit’s mountain of debt and funding needs, Reuters heard late on Wednesday.

And in the newspapers:

* State-run Rosneft, Russia’s largest oil firm, will take over private bank Trust in exchange for writing off debts, Kommersant business daily reported.

* Indian wind turbine maker Suzlon Energy is close to raising $127 million in the form of debt from private equity firms to finance the purchase of Portuguese energy firm Martifer’s stake in Germany’s REpower Systems, the Economic Times reported.

 * China’s Ping An Insurance, which was hit by a $3.3 billion impairment loss last year on its investment in Dutch-Belgian group Fortis, said it will maintain a cautious stance on foreign investments, mainly sticking to Hong Kong stocks, the China Securities Journal cited Chairman Peter Ma as saying. 

* Channel 4 is working hard to thrash out a deal with BBC Worldwide to secure its future, although the government has set the two sides a deadline of 14 days to come to an agreement about a joint venture, the Independent reported. Channel 4 is facing a funding gap of 150 million pounds by 2012. If the talks fail, it is likely that Channel 4 will be acquired by its rival Five.

* Some of the UK’s largest hedge funds have begun making backup preparations to move to either Switzerland or New York unless a draft European directive on alternative investment fund managers is rewritten, the Financial Times reported.

* Fashion chain New Look has not ruled out a public listing in 2010, after dropping an IPO plan in 2007 as investors balked at the 1.8 billion pound price tag, the Financial Times reported. Any decision on an IPO is to be taken by owners Apax and Permira.

China’s Sichuan Tengzhon Heavy Industrial Machinery Co became the surprise buyer for General Motor’s Hummer brand while insurer AIG — another U.S. giant in trouble — cut the asking price for its Taiwan insurance unit. For the day’s top headlines, click here.

And here is what we found of interest in the newspapers.

Global miner Rio Tinto may cut the size of its planned $7.2 billion issue of convertible bonds to China’s Chinalco and raise more equity via a rights issue, the Australian Financial Review reported.

Banks in Qatar, the world’s top exporter of liquefied natural gas, will get cash and bonds in exchange for selling their real estate investments to the government under a $4 billion programme unveiled last week, the daily Gulf Times cited sources as saying.

General Motors Corp’s Saab Automobile unit has narrowed talks with potential buyers for the loss-making Swedish brand to two, the Dagens Industri quoted Chief Executive Jan-Ake
Jonsson as saying.

About 4,000 jobs are at risk as British van maker LDV has fallen into administration after would-be buyer Weststar failed to raise the necessary funds, the Independent and the Financial Times reported.

The Foundry, a London-based visual effects group whose software has been used in films such as “Wolverine”, has been bought back by its management for an amount in the “double-digit millions of pounds”, with the backing of Advent Venture Partners, the Financial Times reported.

This one was coming forever. China’s ambition to claim a place on the global financial stage commensurate with its swelling population and heaving ownership of U.S. debt was as inevitable as the end of the cheap-credit boom years. More importantly, the nearly $20 billion investment by Chinalco, China’s top state-owned aluminum producer, in miner Rio Tinto serves the country’s domestic needs, guaranteeing supplies of raw materials to the struggling Chinese factories that sell around the world.

As Lucy Hornsby writes, roadwork for the long march of Chinese industry abroad is being done by its banks, which analysts tell her are “most likely to buy minority stakes in foreign counterparts … as Western peers bleed red from the global financial crisis.” She cites Industrial and Commercial Bank of China’s 2007 acquisition of a stake in South Africa’s Standard Bank, with its clear implications for funding China’s interest in the resource sector.

Chinalco’s chief says he has no plans to raise his stake in Rio. Right now, the investment is in convertible bonds, so taking more control is a matter of financial maneuvering. And there really is no need. China’s emergence in global business is still a story of raising its game, learning the rules and gaining the skills to make successful businesses.

Given the limited exposure and developmental difficulties foreigners have traditionally had investing in China, it’s easy to cast the Chinalco/Rio deal in a negative light, forgetting for a moment that the collapse in commodities prices has made Rio hungry for capital. But if China doesn’t further invest in the world, then the billions of dollars it takes in every year by selling cheap stuff will continue to exacerbate imbalances in the global economy.

Other Deals News:

* With only days to go until a critical deadline, Sirius XM Radio Inc is still in talks with potential investor Liberty Media Corp, a person familiar with the matter said.

* Shares in small Thai lender ACL Bank surged as much as 18 percent on Friday on speculation that it might be a target of Bank of Ayudhya (BAY), which wants to acquire retail banking businesses.

* Lloyds of London insurer Beazley Group announced plans to raise 150 million pounds ($213 million) to exploit growth opportunities and fund the $35 million acquisition of U.S. underwriting firm First State.

* Indian liquor maker United Spirits said on Friday it was prepared to offer a stake of more than 15 percent and board representation to Diageo Plc to ensure a successful conclusion to talks that began last year.

(PHOTO: Rio Tinto Chief Executive Tom Albanese (R) smiles as Chinalco President Xiao Yaqing (L) shakes hands with Chairman of Rio Tinto Paul Skinner during a meeting in London February 12, 2009. REUTERS/Stephen Hird)