Rio Tinto – Australia’s biggest iron ore exporter – has dramatically torn up a $19.5 deal with its largest customer, Chinalco, and signed a brand new joint venture with arch-rival BHP Billton.
The deal, agreed in February, would have seen Chinalco – which already holds 10% of Rio – upping its stake and pumping cash into the business. Abandoning it at such a late stage is a huge volte-face for Rio Tinto’s board, which is now likely to face some searching questions from investors over why it pursued the deal so far in the first place.
The decision seems to have been driven by shareholder anger that Chinalco was to get preferential treatment, by effectively being the only organisation allowed to partake in what would amount to a rights issue. Fears over Chinese ownership of Australian assets may also have had some part to play.
To give Rio’s bosses due, they have come up with some pretty far-reaching alternatives. Not least is the prompt signing of a multi-billion dollar joint venture with rival BHP Billiton – the very firm which Rio fought off in at hostile takeover battle last year.
It will also launch a $15bn cash call to cover some of the $39m debt it racked up buying Canadian aluminium business Alcan, which should help to pacify shareholders on the rights issue point at least.
The market reacted well to the news, with shares in both Rio Tinto and BHP up around 10%. The same is unlikely to be true of Chinalco or indeed the Chinese authorities generally, who must be feeling pretty peeved right now. Chinalco will receive a $195m break fee, but that is small comfort for the loss of what was a strategically important deal for Chinese industry.
We wish the new happy couple well, but they should remember that hell hath no fury like a Chinese aluminium smelter scorned…