Bye Bye Beijing, hello BHP.
June 06, 2009
RIO Tinto has spurned China's $US19.5 billion ($24.3 billion) rescue deal in favour of the world's fifth-biggest rights issue and a pact to merge its West Australian iron ore operations with those of BHP.
Saving the Rudd Government from a difficult decision on whether to block Chinese resources giant Chinalco's attempt to get a bigger stake in Rio and its mines, Rio will instead raise $US15.2 billion from shareholders by selling new stock at a massive 58 per cent discount.
Separately, BHP will pay Rio $US5.8 billion to become half-owner of a merged iron ore operation in the Pilbara region, sealing a decade-long BHP ambition to unite the operations.
The deal values the iron ore operations at more than $140 billion, ranking them as the second-biggest company in Australia behind BHP itself.
However, the deal still faces stiff scrutiny from competition regulators and from the West Australian Government, which is concerned about a new iron ore monopoly.
It is believed Rio would have embarked on the rights issue even without the BHP deal, with the Chinalco rescue package facing growing opposition from shareholders, and the Rudd Government also privately voicing concerns.
Rio chairman Jan du Plessis, who took the helm in April and has spent most of his tenure listening to shareholder discontent, said improvements in financial markets had provided Rio with new options to the Chinalco deal, which was signed in February in the depths of the global credit freeze.
"We have also received extensive feedback from shareholders, and some from regulators, expressing concerns about the (Chinalco) transaction as structured," Mr du Plessis said yesterday.
The rights issue will take the place of Chinalco's funds in paying down a chunk of Rio's $US40 billion debt, which was largely incurred in the ill-timed 2007 takeover of Alcan.
If regulators and shareholders approve the iron ore joint venture, BHP will realise its long-held desire to merge its smaller Pilbara iron ore operations with those of Rio, which also has ports that are easier to expand.
In a joint statement, BHP and Rio said savings from the deal would have a net present value of $US10 billion.
While neither would say what annual savings might be delivered, a recent UBS report estimated they would be in the realm of $750 million.
"While this deal has been more than 10 years in the making, I believe it has been worth the wait," BHP chief executive Marius Kloppers said yesterday. "Combining these world-class assets and associated infrastructure, which operate side by side ... we can get very, very substantial production, development and financial synergies."
Rio's new plan comes after it earlier this week failed to agree on a revised deal with Chinalco chairman Xiong Weiping, who flew to Australia to discuss potential changes.
Mr Xiong was prepared to offer more cash for assets and reduce the size of its bond offering but could not negotiate a deal.
In a move that has given Chinalco the impression Rio was determined to scuttle the deal, Rio told Mr Xiong it would only agree to the deal if a sale of a stake in the Hamersley iron ore assets and Chinalco's rights to board membership, among other things, were removed.
Despite Rio chief executive Tom Albanese's insistence that relations with Chinalco remained strong and there was potential for future collaboration, the state-owned miner yesterday voiced its disappointment.
"Chinalco has worked hard to respond constructively and engage with Rio Tinto to make appropriate amendments to the transaction terms announced in February to better reflect the changed market background and feedback from shareholders and regulators," Mr Xiong said. "As a result, we are very disappointed with this outcome."
Chinalco did not echo Rio's hopes about potential ventures.
Rio's recent bad run of buying Alcan at the top of the boom and then signing the Chinalco deal at a recent bottom, and its failure to engage with BHP in between, has led to calls for the resignation of Rio's executive directors, Mr Albanese and chief financial officer Guy Elliott.
Yesterday, Rio said it had promoted its iron ore chief Sam Walsh, who will chair the new BHP/Rio joint venture, to executive director.
Mr Albanese said yesterday that he had the confidence of the board. However, the elevation of the well-respected Mr Walsh spurred speculation he could be under consideration for the top job.
To help meet $US19 billion of debt repayments due in the next two years, Rio said it would suspend its progressive dividend policy for this year and not pay an interim dividend. Mr Elliott said Rio planned to spend $US1.75 billion on dividends in the next year, unchanged from 2008, but that the amount per share would be reduced due to the dilution through the rights issue.
Despite Mr du Plessis saying regulatory concern had played a part in changing the Chinalco deal, Mr Albanese would give nothing away. He would not say whether Wayne Swan had indicated the deal would not get through or whether Rio had been surprised by the Government's response.
Rio's biggest local investors applauded Rio's ditching of the Chinalco deal for the rights issue and said the iron ore joint venture would benefit both Rio and BHP.
"We're pleased with the way events have unfolded, we were always unhappy with the Chinalco arrangement," said Ross Barker, managing director of the Australian Foundation Investment Co, one of Rio's top 10 Australian holders and a vocal critic of the Chinalco deal. "The iron ore joint venture provides significant value for ... shareholders of (both) BHP and Rio."
Mr Barker said the terms of the rights issue made it very attractive.
Rob Patterson, managing director of Argo Investments, a top 20 holder of Rio's local shares, said the iron ore merger would provide a large amount of the synergies that would have been supplied by BHP's failed bid. "That is the cream on the cake Chinalco couldn't bring," Mr Patterson said.
He said the terms of the rights issue were very attractive and that Argo would look closely at taking up its allocation.
Shares in Rio and BHP shot higher yesterday. Rio rose $5.59, or 8.4 per cent, to a six-month high of $72.49, while BHP rose $3.07, or 8.7 per cent, to an eight-month high of $38.18.
Rio's 21-for-40 rights issue will be offered at $28.29 a share for Australian holders and pound stg. 14 for London holders.
Credit Suisse, JPMorgan Cazenove and Macquarie Capital are joint global co-ordinators of the rights issue, and its main underwriters.