labels: M&A
Rio terminates Chinalco deal; to raise $15.2 billion through rights issue news
05 June 2009

Mining major Rio Tinto Plc has terminated its $19.5-billion planned deal with Chinese resources giant Chinalco, and the company has placed its shares under a trading halt today. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent).

In a statement to the Australian Stock Exchange, Rio Tinto manager James Gerraty said the trading halt announced before the market opened on Friday would remain in place until 9 June, or pending the release of a final announcement by the company.

Rio Tinto also said it has decided to raise $15.2 billion through a rights issue to solve its debt problems.

It has agreed with rival BHP Billiton for a 50:50 joint venture to develop Western Australian iron ore mines. BHP has agreed to pay Rio US $5.8 billion for equity type interest. The miner said it expects to realise more than $10 billion in synergy benefits.

''Since we announced the Chinalco transaction in early February 20, financial markets have seen a significant improvement. This has had two consequence; firstly the financial transactions with Chinalco became markedly less valuable, and secondly our ability to raise a level of equity appropriate for our needs on attractive terms have improved very considerably,'' said Jan du Plessis, chairman of Rio.

''Given these new circumstances, and coupled with extensive feedbacks we have had from shareholders and others, the boards have concluded that the formation of an iron ore production joint venture in Western Australia with BHP Billiton, together with the rights issue deliver the best solution,'' Plessis added.

Rio Tinto will pay Chinalco a deal break fee of $195 million.

The rights issue consists of 21 new shares for every 40 existing shares at 1,400 pence each to raise approximately $15.2 billion, the company said. This will reduce Rio's net debt to $23.5 billion.

The rights issue was fully underwritten by Credit Suisse Securities (Australia) Ltd, JP Morgan (Australia) Ltd, Macquare Capital Advisors Ltd, and RBS Equity Capital Markets (Australia) Ltd.

Rio, which rejected a hostile offer from BHP in November, is cutting jobs and trying to sell assets. The issue will enable the group to meet its Alcan facility debt repayment obligations due in October 2009 ($7.15 billion) and in October 2010 (as on 30 April 2009, $8.1 billion was drawn under this tranche).

At $15.2 billion, the rights offering would be the second- biggest this year after HSBC Holdings Plc, which sold $18.3 billion of stock in April.

Rio Tinto last swapped hands at $69.90. BHP Billiton shares rise over $2 at $36.80 immediately after trading began today.

Rio, which has a market value of US$68 billion as on 31 March, turned to Chinalco in February to help repair a balance sheet weighed down mainly through the 2007 purchase of Alcan Inc.

Under the scrapped deal, Chinalco would invest $12.3 billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spend $7.2 billion on convertible bonds in the company. If redeemed for shares, the bonds would almost double Chinalco's existing 9.3 per cent stake in Rio Tinto Group to 18 per cent.

 But there has been speculation about the status of the deal for several weeks as the market has changed significantly since the deal was first struck.

The proposed deal with Chinalco, China's largest overseas acquisition and Australia's biggest asst takeover, has also sparked opposition in Australia, amid concerns that a foreign state-backed enterprise would own a strategic stake in the country's biggest natural resource assets. (See: Rio Tinto's majority shareholders oppose Chinalco deal at UK AGM)

Australia's Foreign Investment Review Board was due to make a decision on the deal by the middle of this month.

Rio and BHP are the world's second- and third-largest iron ore producers, while Brazil's Vale SA is the largest iron ore producer. China is the biggest steelmaker.


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Rio terminates Chinalco deal; to raise $15.2 billion through rights issue