Chinese Stake in Rio Rattles BHP Bid

Aluminum maker Chinalco, along with Alcoa, announce their purchase of a 12% stake in Rio Tinto, BHP's rival and takeover target

The fight for control over mining giant Rio Tinto (RTP) took another twist Feb. 1 after China's largest aluminum maker, Chinalco, and Pittsburgh-based metals firm Alcoa (AA) bought a 12% stake for $14 billion in the Australian company.

The announcement comes only days (, 1/29/08) before BHP Billiton (BHP) has to confirm its proposed $122 billion bid for rival Rio Tinto, which, if it goes through, will create a global behemoth in the copper, aluminum, iron ore, and coal markets—commodities whose prices have skyrocketed due to high demand in emerging markets.

Rio has so far brushed off BHP's approach (, 1/22/08), and Chinese manufacturers remain wary of the possible linkup, fearing it could lead to rising costs for commodities needed to keep domestic economic growth percolating. To offset these concerns, Chinalco and Alcoa said their stake would be "strategic," adding they reserved the right to put forward a full bid for Rio Tinto in the future.

The markets received the news with open arms, with some analysts speculating it could lead to a fierce bidding war for the London-listed miner. In late afternoon trading, Rio's shares were up 16%, while BHP stock was up 12%.

A Premium Price

"This move by Chinalco and Alcoa definitely puts a floor under the price for any BHP takeover," says analyst Tom Gidley Kitchin at stockbrokers Charles Stanley (CAY.L). "The 12% stake has ensured BHP will have to pay a significant takeover premium for Rio Tinto."

Under the agreement, Singapore-based company Shining Prospect—fully owned by Chinalco—paid $119 per share for Rio Tinto, approximately 21% above the company's closing share price Jan. 31. Alcoa contributed $1.2 billion to the $14 billion deal.

The question remains, though, whether the move will be sufficient to block BHP's aggressive takeover plans (, 11/9/07), which were first announced in November, 2007. To create by far the world's largest mining firm, BHP had proposed a three-for-one share swap with Rio to give the new company a market capitalization of approximately $310 billion.

Rio Tinto, which remains opposed to the takeover, last year announced plans to spend $9 billion in 2008 to see off BHP's advances. This included expanding mining output and increasing shareholder dividends, as well as jettisoning $15 billion worth of assets not related to its core business.

Pressure on BHP

By paying such a high price for their stake—equivalent to a roughly four-for-one share swap—Chinalco and Alcoa have put the pressure on BHP, analysts said, adding the companies have kept the door open for further movement if an outright bidding war begins.

"Anything above a four-to-one ratio would be a ridiculous price to pay [for BHP]," says Simon Toyne, analyst at London-based Numis Securities (NUM.L). "[Chinalco and Alcoa's] motivations are slightly unclear, but it definitely looks like a blocking stake."

A clearer picture will emerge Feb. 6—the final date for BHP to put forward its offer—although analysts caution that the Chinese and their American partners could face opposition from Australian regulators if they try to make an all-out bid. Previously, authorities had raised concern over China buying into the country's mining sector, which is perceived as a strategic national interest.

While Chinalco and Alcoa's 12% stake still may not scupper BHP's takeover plans, it certainly represents a powerful move from a growing Chinese power keen on protecting access to the commodities it so desperately needs.

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