$24.4bn Chinalco deal with Rio Tinto is deadFont Size: Decrease Increase Print Page: Print Clive Mathieson | June 05, 2009 Article from: The Australian THE biggest deal in Australian corporate history, the $US19.5billion ($24.4 billion) alliance between Rio Tinto and Chinese resources giant Chinalco, was tonight heading for collapse, sparing the Rudd Government from one of its toughest foreign policy decisions.
There was speculation that Rio Tinto would walk away from Chinalco overnight and instead seal a joint venture with its bitter rival, BHP Billiton, involving their iron ore operations in the Pilbara region of Western Australia.
It is understood Rio Tinto has told Chinalco it cannot proceed with the deal, and will raise funds to help pay down debts by asking the existing shareholders for up to $US15billion.
Rio Tinto and Chinalco executives have been seeking to renegotiate the terms of the deal for several weeks, with both sides acknowledging the need for some changes after the strong rise in Rio Tinto shares since the deal was announced in February.
However, sources said Rio Tinto was now putting its efforts into a organising a massive rights issue that it hoped would allow the company to solve its debt problems without the need for additional cash from the state-owned Chinalco.
Sources close to the transaction confirmed to The Australian that Rio Tinto had "notified Chinalco that it cannot proceed with the deal", which would have increased Chinalco's interest in the Anglo-Australian miner to 18 per cent and given it minority stakes in key mining projects.
The Rio Tinto board was meeting in Britain overnight and an announcement on the state of the talks with Chinalco is expected as early as this morning.
Chinalco refused to comment yesterday on its talks with Rio Tinto, and refused to say whether it would go ahead with the Rio Tinto transaction. A Rio Tinto spokeswoman also refused to comment. "We don't comment on market rumour and speculation," she said. "When we've got anything to say, we will say it to the market."
BHP Billiton, which last year walked away from a takeover of Rio Tinto and has been actively lobbying against its Chinalco alliance, could not be contacted.
In April, new Rio Tinto chairman Jan du Plessis said the company continued "to be committed to pursuing the Chinalco transaction". Rio Tinto yesterday declined to comment on whether the board stood by that statement.
But Rio Tinto's pursuit of the rights issue as an alternative to the Chinalco deal is threatening to derail the talks completely. If the deal is withdrawn by Rio Tinto, Chinalco is likely to ask
the miner to pay an agreed
$US195million break fee.
The deal's collapse could spare the federal Government from having to rule on the transaction. The Foreign Investment Review Board was due to make a decision on the deal by the middle of the month, with final approval resting with Wayne Swan.
Although most observers believed the deal would be approved after both sides made concessions and agreed to strict conditions limiting Chinalco's influence over Rio Tinto and its operations, the biggest foreign investment in Australian history has become a heated political issue.
At the centre of the debate is Chinalco's status as an entity wholly owned by the Chinese Government and its future role as both a customer and shareholder of Rio Tinto. There were concerns that rejection of the deal, which is China's biggest overseas investment, could damage relations with Beijing. In March, the Treasurer knocked back on national security grounds an investment by another state-owned Chinese company in one of OZ Minerals' South Australian projects.
Chinalco chairman Xiong Weiping was in Canberra yesterday for talks with government officials. Chinalco declined to comment on the talks.
The Chinese company has previously indicated that an equity stake of at least 15 per cent in Rio Tinto and board representation are key components of any deal.
According to reports in China yesterday, Chinalco vice-president Lu Yongqing said the company had not changed the terms of its proposal. But he added that Chinalco might not be able to accept certain changes to the deal if the interests of the company and its shareholders could not be protected.
Under the original Chinalco deal, the Chinese company would inject $US19.5 billion into Rio Tinto in return for increasing its stake from 9 per cent to 18 per cent by subscribing for bonds convertible into shares. It would hold two board seats and take stakes of between 15 and 50 per cent in projects such as Rio Tinto's Pilbara iron ore arm and Weipa bauxite operation.
When the deal was announced, it was hailed by Rio Tinto as the best solution to its $US40billion debt pile. At the time, the company's shareholders in Britain and Australia were considered unlikely to provide enough additional capital to appease its banks.
Rio Tinto's Australian-listed shares crashed as low as $32 in December after BHP Billiton withdrew its hostile takeover bid. But since then Rio Tinto shares have more than doubled, and some shareholders are demanding the opportunity to buy shares or bonds in Rio Tinto on the same terms as Chinalco.
It is believed Rio Tinto and its advisers are also canvassing support for a rights issue, raising up to $US15billion.
"It has become clear that du Plessis has to scrap a deal that made sense six months ago but doesn't now," one source said. "He now has the delicate task of balancing the interests and concerns of his shareholders with finding a financial solution that is doable and makes sense. Given everything, the rights issue."
RIO Price at posting:
$52.76 Sentiment: LT Buy Disclosure: Held
(20min delay)