Changes May Come to Rio Tinto's Chinalco Deal (RTP, BHP)

The deal between China’s government-owned aluminum company, Chinalco, and Rio Tinto plc (NYSE: RTP), in which Rio gets $19.5 billion and Chinalco gets a larger stake in Rio may be changing. There are several reports this morning that Rio is encouraging Chinalco to scale back its offer to smooth the Australian regulatory approval process. Chinalco, which already owns about 9% of Rio, originally offered to buy $7.2 billion in Rio’s convertible bonds, and to purchase an additional 9% stake in Rio for $12.3 billion.

It’s the 18% stake that is causing the problem. Rio wants Chinalco to drop that to about 15% and make the other 3% available to Rio shareholders who claim they wanted to buy a stake in Rio all along.  Australian rules limit foreign ownership of Australian companies to 15%. Rio and Chinalco planned to appeal for an exemption from that rule, but Rio appears to have given up on that idea.

Now, it needs to persuade Chinalco to settle for 15% for the same $12.3 billion in assets. Rio’s share price has jumped about 60% since Chinalco’s offer, so the re-jiggering of the deal isn’t altogether unlikely. In the wings is BHP Billiton Ltd. (NYSE:  BHP), which saw its $140 billion offer to buy Rio spurned last year. BHP has argued against the deal and could come back with its own offer for some or all of Rio.

Rio stock has recently been upgraded by some analysts, and the shares have been trading well above 52-week lows. But this morning, shares are down about 1.5%, to $172.60. Rio’s 52-week range is $59.20-$538.00.

Paul Ausick
May 21, 2009