Rio Tinto Group

Chinalco stymied on Rio Tinto bid

PUBLISHED : Monday, 18 February, 2008, 12:00am
UPDATED : Monday, 18 February, 2008, 12:00am

Aluminum Corp of China, which paid US$14.05 billion for a stake in mining giant Rio Tinto, is unable to launch a full scale bid for six months because it told regulators at the time of the acquisition that it had no intention of doing so.

The statement now binds the company to a half-year 'quiet period', according to a source.

'When Chinalco talked to the authorities they made their intentions clear, they would not buy any more shares. You can rarely go against that,'' the source said.

Section 2.8 of the UK Takeover Code says that without the permission of the Takeover Panel, which overseas mergers and acquisitions, an acquiring company that states it has no intention of moving to a general offer is not able to make such an offer, nor are persons working in concert with them, for six months.

Chinalco, as Aluminum Corp is known, and US partner Alcoa had agreed to buy as much as a 14.9 per cent stake in Rio Tinto, according to a stock exchange filing last week. The two companies, via adviser Lehman Brothers, approached existing Rio shareholders on February 1 and managed to buy a 12 per cent stake by the end of the day.

It was the largest share raid, according to bankers in London, and surpassed the US$5.4 billion acquisition of a 20 per cent stake in South Africa's Standard Bank Group in October by Industrial and Commercial Bank of China as the largest overseas acquisition by a mainland company.

The shares were bought through Singapore-based Shining Prospect, which became the largest shareholder in Rio, the world's third-largest mining company.

Chinalco has since said that an attempt to acquire the whole company was an option, though Chinalco president Xiao Yaqing has also been quoted as saying the investment in Rio was strategic and there were no plans to interfere with current management.

Alcoa, the world's third-largest aluminium maker, contributed US$1.2 billion for the stake acquisition and is considered a junior partner.

Under British law a company can identify specific circumstances at the time of making an acquisition that could trigger a general takeover offer and escape the six-month freeze on any further acquisitions. But is not clear what circumstances Chinalco might have cited.

Rio executives said last week the company and Chinalco could potentially work together. Chinalco has been diversifying from the aluminium sector. In August it completed an US$860 million takeover of Peru Copper, giving it total copper reserves of about 20 million tonnes.

Chinalco's acquisition of Rio shares forced BHP Billiton, the world's second-largest mining company, to raise its offer for the company 13 per cent to US$147.4 billion last week from the US$140 billion it had said it wanted to pay in November.

BHP is now offering 3.4 shares of its shares for every one of Rio's instead of the original three-for-one offer.

Rio has rejected both offers saying they significantly undervalue the company. About 70 per cent of shareholders in BHP and Rio hold shares of both companies.

One option for BHP would be to circumvent the Rio board and try to convince them of the merits of the deal. Rio has advised its shareholders to take no action.

'The ball's in BHP's court,'' said one market observer.

A BHP-Rio merger would rank as the second-largest ever after Vodafone's US$203 billion takeover of Mannesmann in 2000.

The combined company would create the third-largest company in the world behind ExxonMobil and General Electric and control about 27 per cent of the world's iron ore, a quarter of the world's uranium and effectively control global trade in coal, copper and diamonds.

Such dominance has big commodity buying countries such as China, Japan and India afraid of monopolistic pricing power.