rio tinto's last stand

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Rio Tinto's last stand
Stephen Bartholomeusz

Published 3:38 PM, 10 Mar 2011

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Rio Tinto has played the only card it has left if there is to be any prospect of a successful denouement to its otherwise deadlocked bid for Riversdale Mining.

The decision to increase its offer for Riversdale from $16 a share to $16.50 a share, strip all the conditions in the offer other than the 50.1 per cent minimum acceptance condition and declare the offer final in the absence of a competing offer is designed to generate some momentum for an offer that was going nowhere. The increase in price is conditional on Rio Tinto achieving the 50.1 per cent interest by 23 March.

At face value the moves change nothing and the bid can?t succeed, given that India?s Tata Steel and Brazilian steelmaker CSN have significantly increased their Riversdale shareholdings since Rio Tinto?s bid was first announced and now control 47 per cent of the coal miner between them.

Both steelmakers appear to be more interested in protecting their access to future production from Riversdale?s big Zambeze project in Mozambique than in making a profit by selling into the bid.

The size of their holdings (Tata owns just over 27 per cent of Riversdale and CSN 19.9 per cent) makes it practically impossible for Rio to achieve its minimum acceptance conditions, given that it would need to attract acceptances from about 95 per cent of shares held by other shareholders.

The shift in tactics is, however, clearly designed to try to create some pressure on shareholders to accept and generate some momentum for the offer, which was struggling to attract acceptances despite the fact that Rio Tinto has a board recommendation and the prospect of a competing offer emerging is remote. Rio Tinto has a relevant interest in about 19 per cent of Riversdale?s capital, most of it through pre-bid arrangements.

Because of the size of the Tata and CSN shareholdings Rio Tinto couldn?t try to create a flow of acceptances and momentum for the offer by declaring the offer unconditional, given it would have been running a very real risk of having the best part of $2 billion locked into a minority holding.

That left it with the choice of either simply walking away or trying something more subtle which, if it failed, would still allow it to walk without leaving any substantial capital locked into Riversdale.

The changes to the offer today are, it appears, designed to send a message to Riversdale?s institutional shareholders and hedge funds, essentially saying to them that if they want to have any chance of getting a takeover premium for their shares they need to help Rio by accepting the offer and if they wanted to maximise their profits they need to do so before 23 March.

As indicated, that almost certainly won?t get Rio across the line ? it is improbable that even if all the institutional shareholders accepted it would be able to attract 50.1 per cent of capital. What it might do is put some pressure on Tata.

Tata and CSN (which appear to have a very tense and mutually suspicious relationship) are on the Riversdale register because they want access to supply for their steel mills. They aren?t big coal producers and probably need Rio Tinto?s expertise and capabilities if the giant Zambeze project is to be developed.

The only reason Rio Tinto would be persevering with the bid is if it believes it can attract enough support to put it within sight of the 50.1 per cent minimum acceptance (and outright control) level. Ideally it would have received acceptances for about 43 per cent of Riversdale?s capital before it re-opens discussions with Tata.

If Rio Tinto?s bid fails Tata and CSN will be left with large and expensive counter-balancing shareholdings in a company that may not have the balance sheet or experience to reassure them Zambeze will be developed efficiently. They may also be called on for more capital.

Rio Tinto can address those issues while also reassuring the steelmakers that they will get access to coal. If Rio Tinto can get to 43 per cent it could go to Tata and ask it to accept for at least 7 per cent of Riversdale, getting Rio to its minimum acceptance level and effectively creating what would be a joint venture between Rio and the other two big shareholders.

If Rio Tinto were successful in flushing out all the other shareholdings, it would own 60 per cent of Riversdale and the steelmakers 20 per cent each. More likely Rio would own less than 60 per cent and there would be a rump of minority shareholders but at least Rio would, in those circumstances, have secured control and be in a position to reassure both Tata and CSN that it would be able to protect both their interests.

Without a solid flow of acceptances that takes its interests above 40 per cent, and ideally above 43 per cent, Rio Tinto will struggle to create an outcome where Tata feels comfortable in assisting the offer to get across the line. Rio Tinto will now await anxiously signs that the changes to the offer, and the deadline it has imposed on the extra 50 cents a share, are enough to inject life and hope into the bid. It will be a nervous period in the lead-up to the deadline.