Chinese raid on Rio could thwart BHP

The Chinese Government-owned resources group Chinalco and the US aluminium producer Alcoa have bought 12 per cent of Rio Tinto's London-listed shares in a move that could block or severely complicate BHP Billiton's plans to buy its rival.
The stake, worth £7.2 billion ($16 billion), was bought at a price that equated to a 4-for-1 offer from BHP, compared with its rejected 3-for-1 proposal. Rio shares rose 14 per cent in London last night on the news.
The stake is enough to block a hostile bid from BHP, which requires the support of 90 per cent of Rio shareholders, but by itself it could not block a scheme of arrangement for a friendly merger requiring 75 per cent support.
Chinalco and Alcoa said they did not currently intend to make a full takeover offer for Rio, but they reserved their rights to purchase more Rio shares within the next six months if BHP or another party made a firm offer for Rio.
The motive for the purchase remained unclear last night. Chinalco owns 39 per cent of the publicly listed Chinese aluminium producer Chalco, but the parent company also owns assets in copper and other metals. Alcoa's $US27 billion bid for the Canadian aluminium producer Alcan was trumped by a $US38.1 billion offer from Rio last year and there is speculation Alcoa wants to be in a position to negotiate the purchase of some former Alcan assets.
Alcoa, which last year sold a stake in Chalco for a profit, put up only $US1.2 billion of the $US14 billion of funding in a special-purpose vehicle created to buy the Rio stake. BHP's camp said it thought Chinalco and Alcoa simply wanted a seat at the table to purchase the Alcan assets. But sources close to Chinalco said the company intended to become a diversified miner.
A Rio spokesman, Ian Head, said that the Chinalco-Alcoa share purchase "reinforces our perspective that BHP has continued to undervalue Rio Tinto".
It is believed that Rio remained unclear about the consortium's intentions and expressed some surprise that the buyers were aluminium producers rather than a steel giant like Baosteel.
Most of the objections to the proposed BHP-Rio tie-up have come from steel mills, which are worried about the merged company controlling nearly 40 per cent of the world's iron ore supply.
Last month, the London Daily Telegraph reported that the investment bank Lehman Brothers had been retained to advise the Chinese on options to block the Rio bid.
Lehman was last night publicly revealed as the bank advising Chinalco and Alcoa. It is believed last night's share raid, which bought a stake from several hedge funds and other investors long on Rio shares, had been planned for some time.

Since BHP's approach in November, Rio has never rejected the logic of a combination between the two companies. But it has rejected the 3-for-1 proposal as "two ballparks" away from fair value. Last night's share raid put added pressure on BHP to significantly improve its offer before a deadline to "put up or shut up" by next Wednesday. BHP's board met yesterday in Melbourne and at that point the most likely option looked to be formalising its rejected 3-for-1 proposal.
The Liberium Capital analyst Michael Rawlinson said last night that the Chinese Government could be attempting a break-up bid for Rio, with Alcoa poised on the sidelines to pick up some aluminium assets.
"While BHP has looked to consolidate by creating a super major, the Chinese Government is leading an effort to fragment the industry," he said.
He added that the move could push BHP to consider making a "material increase" to its 3-for-1 offer.
Earlier this week, Rio released a valuation by its advisers at Macquarie Bank which said BHP could afford to pay up to 4.25-for-1 on current price-earnings ratios or up to 5-for-1 given a re-rating.
The possibility of the Chinese paying cash could change the playing field significantly.