A Chinese Bid For Rio Tinto (RTP)

Rio Tinto (RTP) has rejected advances from larger rival BHP Billiton (BHP). It claims that BHP’s offer is too low, and, because it is in stock, it carries too much risk. So RTP is considering selling $15 billion in assets, perhaps to raise its dividend, and its is attacking the merger savings forecast by BHP.

But, what if someone came along with an offer  which was largely cash? According to Reuters, Baosteel Chairman Xu Lejiang told a Chinese business newspaper that his firm, that largest steel company in the country, might make an offer for RTP. He indicated that the price might be over $200 billion. But, the Chinese government does have access to that kind of capital. And, it might just put it up to control a huge portion of the world’s metal production industry. “Chinese steelmakers, if united, are capable of making such a bid,” said Lu Yizhen, who helps manage $640 million at Citic according to Bloomberg.

That could create a problem for the Rio Tinto board and Western governments. RTP stock has dropped some since it rejected BHP. If a Chinese company bids cash, well above the current price, what would be the argument for turning it down?

That moves the conversation to the "strategic asset" realm. Could Europe, Australia, and the US live with Chinese control of such a vast part of global metals production being controlled by the mainland communists? If not, RTP shareholders may have a long wait for a higher bid.

Douglas A. McIntyre