Keeping score: Rio, real estate, rising rates

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  Earlier this year, Chinalco announced a multi-continent $19 billion investment in Rio Tinto, which was withdrawn as a result of the new mega-deal.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.

Iron ore: Australians 1 Chinese 0

(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.

Deals du Jour

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.

Deals du Jour

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.

Friend ore foe

RIOTINTO/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.

Going Nuclear

It is said that all that glitters is not gold. Keep that in mind when considering the bidding war heating up the nuclear power business. France’s EDF has offered $6.5 billion for half of Constellation Energy Group‘s nuclear business and some other assets, trumping Warren Buffett’s bid of $4.7 billion for all of Constellation.
If plummeting demand for everything from new cars to tin foil could fell BHP‘s monster bid for Rio Tinto, why wouldn’t it weigh on demand for energy? While nuclear power has regained some favor as a cheap, relatively clean alternative to nasty fossil fuels, is it really safe to expect consumers to ramp up electric heat this winter, and air conditioning next summer, when they are worried about losing their jobs?
And today brings more evidence that the lengthy, torturous bid process BHP endured before walking away from Rio Tinto may have saved it from dealing with a disastrous downturn in demand. Freeport McMoran, which bought Phelps Dodge for $26 billion two years ago, slashed its dividend this morning after raising it only four months ago.  
Constellation shares rose nearly 20 percent to over $30 this morning, but that is still well below the value of the EDF bid — $52 a share. Perhaps investors aren’t quite so warm and fuzzy toward nukes after all.

* Australia said it is open to a $5.9 billion merger between Qantas Airways and British Airways as long as it’s not a takeover, sending the Australian carrier’s shares up nearly 10 percent.

* A Japanese unit of Prudential Financial plans to bid for two Japanese life insurers put up for sale by American International Group, people familiar with the matter said.

The Day After for Rio Tinto

A day after mining giant BHP Billiton dropped its bid for rival Rio Tinto, Rio said it was confident it could sell assets worth billions of dollars. Analysts aren’t convinced.

As the credit crisis dries up available funds, some companies are backing away from buying anything.

“The environment over the next six to 12 months is not going to be a good environment for selling assets,” said FW Holst analyst Rob Craigie.

BHP backs down

BHP announced an all-share offer valuing Rio at about $193 billion last November, as mining boomed worldwide. BHP said the risk of taking on Rio’s much heavier debts, and the low prices it could expect from asset sales forced on it by regulators, were among the factors behind the decision to abandon the bid.

The decision could have far-reaching consequences for consolidation in the industry, writes Reuters’ John Kemp.

“For more than two decades, merger policy in the EU and around the world has become progressively more permissive, as regulators cited new theories of market “contestability” to permit accumulation of market shares that would have been blocked had they been proposed in the 1960s and 1970s.

Only Cheerleaders Need Apply

A member of professional cheerleading squad practises for the 2008 Beijing Olympic Games and Paralympic Games in Dachang CountyThe yo-yo that is Lehman Brothers’ stock took another spill before the market opened on Monday, after a top South Korean regulator threw cold water on the idea of a state bank buying the battle-scarred Wall Street warrior. Financial Services Commission Chairman Jun Kwang-woo told reporters Korea Development Bank (KDB) should be a “cheerleader” and let local private banks take the lead in any such purchase. KDB’s interest lit a rocket under Lehman’s shares on Friday. When asked about the status of KDB’s possible interest in Lehman Jun said: “That would be an international marriage. Would you get married just after one or two blind dates?” A couple of blind dates might be a step up from the shot-gun buyouts that South Korea’s banks faced after the Asia crisis.

Canada’s Precision Drilling Trust will buy U.S. driller Grey Wolf for $2 billion in cash and stock, creating one of the largest North American oil and gas rig operators. The announcement comes a month after Grey Wolf shareholders voted down a proposed purchase of well-servicing company Basic Energy Services. Precision Drilling, Canada’s largest oil and gas driller, first made an unsolicited purchase offer for Grey Wolf in June. News that a deal had been struck emerged on Sunday. Based on financial results through June, the combined companies will have annual revenue of $1.8 billion.

Germany’s Commerzbank could buy insurer Allianz‘s Dresdner Bank possibly by the end of this month, according to a source familiar with the situation at the bank. German weekly Welt am Sonntag said an agreement between the two was possible within the coming week. The two companies had agreed on the basic principles of the transaction, according to the paper, which said Commerzbank would buy Dresdner for slightly more than 9 billion euros ($13.38 billion) and Allianz would vouch for writedowns on the balance sheet of Dresdner of up to 1 billion euros. The sums were still being negotiated. Allianz would have a stake of slightly less than 30 percent in the merged bank, the report also said.

M&A highlights sparse amid summer doldrums

beach1.jpgAugust is traditionally a quiet month for M&A, as bankers head out to the Hamptons or further afield. This year could prove especially quiet as people make the most of the slow dealflow — particularly on the private equity side — to take longer than usual breaks.

But even as Wall Street slows down for the summer, a few auctions are showing signs of life. The effort to sell Irish drugmaker Elan’s drug delivery unit is one sale that is hotter than most, according to bankers. First round bids went in last week and a number of U.S. private equity names are said to be keen on the asset, which could fetch $1.3 billion to $1.4 billion.

Also still in play through the dog days of summer are Reed Elsevier’s Reed Business Information unit, with first round bids due this week expected to range from $2 billion to $2.5 billion, and Rio Tinto’s U.S. coal assets.