2nd UPDATE: Rio Drops Chinalco, Plans Rights Issue And BHP JV
June 04 2009 - 11:01PM
Dow Jones News
Rio Tinto Ltd. (RTP) said Friday it is terminating its planned
US$19.5 billion alliance with Aluminum Corp. of China, or Chinalco,
and instead launching a US$15.2 billion rights issue and entering
into an iron ore joint venture with BHP Billiton Ltd. (BHP.AU).
The Chinalco deal, which would have been China's biggest ever
overseas investment, had drawn opposition from investors and
Australian politicians, but in the end it was the brightening
market conditions that overtook the deal.
Rio Tinto Chairman Jan du Plessis said improving market
conditions were behind the decision to terminate the deal, which
had been designed to ease Rio's US$38.7 billion debt burden.
"Firstly, the financial terms of the Chinalco transaction became
markedly less valuable and, secondly our ability to raise a level
of equity appropriate for our needs on attractive terms has
improved very considerably," he said in a statement.
The miner will now carry out a 21-for-40 rights issue to raise
US$15.2 billion, with the offer pitched at GBP14 per share in the
U.K. and A$28.29 a share in Australia.
The pricing of the rights issue in Australia represents a 57.7%
discount to the last trade of Rio shares Thursday before the
announcement.
One analyst said the steep discount reflected the complexity of
carrying out a rights issue as a dual-listed company, but was still
greater than expected.
Du Plessis said the funds raised will allow Rio to reduce its
net debt to US$23.2 billion and meet repayments due this year and
next on debt associated with its US$38.1 billion purchase of Alcan
in 2007.
Rio also announced Friday it has entered into an agreement to
form a joint venture with BHP at the pair's iron ore operations in
the Pilbara region of Western Australia.
Rio said the joint venture will deliver synergies of more than
US$10 billion as adjacent mines are combined into single
operations, rail haulage is made more efficient and future growth
is optimized.
These are the very synergies that drove BHP's failed all-share
takeover bid for Rio last year, which raised concerns from European
competition regulators over a reduction in competition, and the
current joint venture plan will again face European regulatory
approval.
However, the two miners hope that their commitment to continue
to market their iron ore individually will win over competition
regulators.
"The JV makes sense for both companies but I'm yet to be
convinced how they'll get around the competition issues," Fat
Prophets analyst Gavin Wendt said.
News of the rights issue and iron ore deal boosted Rio's shares,
which were up 10.4% to A$73.86 at 0230 GMT while BHP climbed 7.8%
to A$37.85 in a broader Australian market up 1.2%.
"The deal eliminates the uncertainty hanging over Rio over the
last six to nine months and shows the influence of their
shareholder base, particularly in the U.K., where they were very
committed to a discounted entitlement issue," Shaw Stockbroking
Head Of Trading Jamie Spiteri said.
Chinalco Chairman Xiong Weiping said the Chinese group had
worked hard to engage with Rio on potential changes to the
transaction terms to reflect the changed market conditions and
feedback from shareholders and regulators since the deal was struck
Feb. 12.
"As a result, we are very disappointed with this outcome," he
said in a statement.
"We continue to believe our proposal presented an outstanding
value-creating opportunity for all Rio Tinto shareholders and would
have provided a strong platform for a long-term strategic
partnership between the two companies."
Rio also released an unaudited net profit of US$1.60 billion for
the first quarter, down from US$2.94 billion last year, and said it
won't pay an interim dividend in light of the current macroeconomic
outlook. However, it said it does expect to pay a final
dividend.
-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094;
alex.wilson@dowjones.com
(Bill Lindsay contributed to this story)