BHP Billiton looks askance at Rio Tinto-Chinalco tie-up

RIO Tinto’s former suitor, BHP Billiton, is waiting in the wings, deciding whether to challenge the mining company’s US$19,5 billion (N$194 billion) tie-up with Aluminium Corporation of China (Chinalco), but it would need to offer a similar inventive package to have any hopes of success.

BHP Billiton and other mining groups could submit individual bids for assets, but they would have little chance of wooing Rio Tinto away from state-owned Chinalco’s twin approach of taking stakes in Rio Tinto’s mines and buying convertible bonds.Even a competing higher bid for one mine would be likely to be rejected by Rio Tinto’s board, since it would torpedo the Chinalco deal that gives debt-heavy Rio Tinto crucial breathing space on debt payments for two years.All the elements of the Chinalco deal – which appears to have been originally dreamt up as a defence against BHP Billiton’s US$66 billion all-share takeover bid, which was withdrawn in November – are tied together.’The two parts of the deal are interconditional. I think it is a masterstroke for Chinalco,’ said London-based ING analyst Nick Hatch.BHP Billiton was evaluating the situation, waiting to gauge whether Rio Tinto would get regulatory approvals and shareholder support, industry sources said.’They’ll give it some time and see how it plays out,’ one said. ‘This is in the very early stages, there’s not a shareholder vote until May.’Some major shareholders have complained that they would have preferred a rights issue instead of the Chinalco deal, so they could participate in the fundraising and not have their shareholding reduced.If BHP Billiton decides to make a move to counter Chinalco, it would have to form a comprehensive package giving Rio Tinto at least US$20 billion in cash.BHP Billiton is banned from making another full-scale bid for Rio Tinto under UK takeover rules, after withdrawing its bid in November. The ban will last until next November.However, BHP Billiton is not banned from buying individual assets from Rio Tinto, and Rio Tinto’s board would have to seriously consider such an approach if it offered similar benefits to the Chinalco deal.The Chinalco deal includes a break fee of US$195 million.After Rio Tinto announced late last year that it was considering selling more assets to chip away at its US$39 billion pile of debt, BHP Billiton inquired about buying some of them, but got a frosty reception, said an industry source.This was in line with Rio Tinto’s tough stance during the hostile takeover battle with BHP Billiton that Rio Tinto did not need to join up with its biggest rival.Rio Tinto chief executive Tom Albanese said on Thursday that talks with Chinalco about a possible deal began in earnest after the Beijing Olympics.This was at a time when BHP Billiton was still seeking to get regulatory approvals for its takeover offer, so a possible deal with Chinalco could have provided Rio Tinto a defence option.Albanese said that he regarded the sale of half of its 30 per cent interest in the world’s biggest copper mine, Escondida in Chile, to Chinalco for US$3,39 billion as a good price.’This is a very strong value for Escondida and, it’s fair to say, much stronger value than they [BHP Billiton] would have ever entertained.’A BHP Billiton spokesperson declined to comment, but company officials have said previously that they would be potentially interested in Rio Tinto assets, including its stake in Escondida, which is run as a joint venture, with BHP Billiton as operator and holding 57,5 per cent.The remainder of Escondida is owned by a unit of Japan’s Mitsubishi, with 10 per cent, and the World’s Bank’s International Finance, with 2,5 per cent.BHP Billiton has pre-emptive rights over Escondida, but it is unclear whether they will be activated by the Chinalco deal, since the 15 per cent Rio Tinto sold was in the form of a ‘strategic alliance note’.The notes are synthetic instruments that track the cash generated by the assets and give a return based on that. -Nampa-Reuters