Rio Tinto shareholders and the Rudd government should knock back Rio’s capitulation to the Chinese, due to be announced later today. If the details reported so far are correct, the deal looks to be a stinker – for the company and for Australia.
Rio chief executive Tom Albanese should have listened to Jim Leng, the man who spent three weeks as chairman arguing against the deal before quitting last week because he could neither persuade Albanese and a majority of the board, nor support the plan.
His view was that a financial problem should have a financial solution, not a strategic one.
Leng’s right: cash panics are not a good time to make major, company-changing decisions, if it can be avoided.
As it is, instead of offering new discounted shares to its existing owners, Rio will today announce a $30 billion deal with the Chinese government-owned aluminium firm, Chinalco, to sell it convertible debt and strategic stakes in several key assets.
There was no auction: specifically, BHP Billiton – a cashed-up and known keen buyer of Rio assets – was not given a look in. Obviously the humiliation of having turned down BHP’s takeover offer and then going back cap in hand to Marius Kloppers for cash was too great.
The Albanese alternative is to sell $11 billion worth of debt securities that will turn into 9 per cent of the issued capital, plus key stakes in Hamersley Iron, Escondida, Weipa, Boyne, Yarwun, Grasberg, La Granja and Kennecott Utah Copper to a Chinese state-owned company that is operating at a loss, but is able to get its hands on money from the China Development Bank.
Subject to the detail due out today, it looks a poor decision. Rio is not only selling assets at the bottom of the cycle, having overpaid for Alcan at the top, it is also giving up a takeover premium and selling effective control to a customer.
And although the deal has been negotiated with Xiao Yaqing, the entrepreneurial head of Chinalco, there is no doubt that Rio is hopping into bed with the government of China – a state that has a keen interest in keeping commodity prices down, especially iron ore.
Fairfax’s Beijing correspondent, John Garnaut, has some fascinating details this morning on the men involved in the deal.
Xiao Yaqing is a close friend of Chen Yun, the man who runs the China Development Bank, which is providing the funds. Chen is the son of Chairman Mao’s top economic planner, Chen Yuan. The man who structured the deal is Levin Zhu, the head of China International Capital Corp and the son of former Chinese Premier, Zhu Rongji.
Garnaut says Xiao is about to be promoted to a “faceless but powerful role” within the government, such as deputy secretary-general of the Chinese cabinet.
The official financial newspaper in China, Securities Times, carried a story recently that said Chinalco’s move on Rio was supported in Beijing because it would “contain and control pricing power monopolised by multinational companies".
So Rio is permanently giving up its independence and changing the face of the global commodities trade to fix a short-term cash shortage that it brought upon itself.
True, it’s a big cash shortage: there is $14 billion of bank debt due this year and another $15 billion due next year. But there is not much doubt institutional investors would have given the company that money – and still would.
The deal between Rio and Chinalco is far from a fait accompli. It requires approval from both Rio’s shareholders and the federal government.
BHP is lobbying hard in Canberra to get it knocked back, and Rio’s owners would no doubt be unnerved by the obvious split within the boardroom about the deal.
RIO Price at posting:
$41.01 Sentiment: None Disclosure: Not Held
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