China takes stake in Rio, threatens BHP bid plan

LONDON/BEIJING Fri Feb 1, 2008 4:39pm EST

A haul truck is loaded with iron ore at a Rio Tinto mine in Western Australia. China has muscled in on miner BHP Billiton's attempts to buy rival Rio Tinto, with its biggest aluminum producer teaming up with U.S. group Alcoa to buy a 12 percent stake in Rio. REUTERS/Rio Tinto/Handout

A haul truck is loaded with iron ore at a Rio Tinto mine in Western Australia. China has muscled in on miner BHP Billiton's attempts to buy rival Rio Tinto, with its biggest aluminum producer teaming up with U.S. group Alcoa to buy a 12 percent stake in Rio.

Credit: Reuters/Rio Tinto/Handout

LONDON/BEIJING (Reuters) - China teamed up with U.S. aluminium producer Alcoa (AA.N) to buy a $14 billion stake in Rio Tinto (RIO.L) on Friday and said it may make a bid, threatening miner BHP Billiton's (BLT.L) efforts to win Rio.

The move by state-owned Aluminum Corp of China (Chinalco) is the country's biggest ever investment overseas -- Alcoa spent only $1.2 billion -- and comes days before a regulatory deadline on Wednesday for BHP (BHP.AX) to make a firm offer for Rio (RIO.AX) or to walk away.

Chinalco and Alcoa said they had bought a 12 percent stake in Rio's London-listed shares giving them a holding of over 9 percent, including Rio's Australian listed shares.

They said in a statement they did not currently intend to make an offer for the whole of Rio, but reserved the right to do so if another party made a firm bid.

Rio, the world's No.2 miner by market value, has rejected a 3-for-1 all-share offer from No.1 BHP, worth $126 billion at current prices. Analysts have long tipped China to seek an influence as both companies' biggest customer.

Investors said the stake was not enough to stop BHP from buying Rio.

"They (BHP) would have to bid really big," said Graham Birch, a fund manager at BlackRock (BLK.N), which is a major shareholder in both Rio and BHP and sold some stock to Chinalco.

Investment bank Lehman Brothers LEH.N said it bought the stake in Rio for Chinalco and Alcoa at 60 pounds a share, 21 percent above Rio's closing price of 49.56 pounds on Thursday.

Rio shares leapt as much as 17 percent to 58.00 pounds and closed in London up 13 percent at 56.42 pounds while shares in Chinalco's unit, Aluminum Corp of China Ltd (Chalco) (2600.HK) (601600.SS), finished 12 percent higher in Hong Kong. BHP shares ended 9.8 percent stronger in London.

BHP's offer for Rio, now worth about 50 pounds a share, would be the world's second-biggest takeover and create a $317 billion company with a massive controlling force across a range of commodities such as copper, aluminium, iron ore and coal.

The proposal, announced on November 8, has sparked a frenzy of bid activity in the mining industry, as companies jostle for scarce resources and to get a bigger slice of booming commodities markets. Brazil's Vale (VALE5.SA) said last month it was in talks to buy Anglo-Swiss group Xstrata XTA.L in a deal which analysts have said could approach $100 billion.

SPUR

Analysts were divided whether Chinalco and Alcoa's move would deter BHP or spur it into making a higher offer.

"The door is still very much open for BHP. 12 percent is not a blocking stake... and 60 pounds a share is equivalent to about 4-to-1 (BHP shares per Rio share) and we think BHP can go up to about 4.5-to-1," said Liberum Capital's Michael Rawlinson.

But Julian Chillingworth, Chief Investment Officer at Rathbone Investment Management, which owns Rio shares, said the stake made life much harder for BHP.

"BHP would have to raise the bid quite aggressively and I don't see these two new shareholders as sellers in the short term because they obviously bought the stake to make sure they've got independent supply," he told Reuters.

BHP declined to comment.

The stake purchase would not block a BHP takeover of Rio but makes a hostile bid difficult because an unsolicited bid would force BHP to win more than 90 percent of Rio in order to force minority investors to sell out, bankers and lawyers said.

Chinalco President Xiao Yaqing told reporters in London the company had bought the stake for its own strategic reasons and the Chinese government did not interfere in its decisions.

"This investment was driven primarily by our strategy to develop into a diversified metals and mining company," he said.

Rio said the stake purchase reinforced its position that the current proposal from BHP undervalued it.

The two companies have a long history together. In September 2007, Alcoa sold its stake in Chinalco's Chalco unit for $2 billion -- a $1.8 billion profit on an investment it held since Chalco's 2001 initial public offering.

A source familiar with the situation said China Development Bank, a policy lender that has backed some of the country's biggest overseas acquisitions, led the funding of the purchase.

BHP is being advised by Goldman Sachs (GS.N), Gresham in Australia, Citigroup (C.N), HSBC (HSBA.L) and UBS (UBSN.VX), while Morgan Stanley (MS.N), Rothschild, Macquarie (MQG.AX) in Australia, Credit Suisse (CSGN.VX), JP Morgan Cazenove and Deutsche Bank (DBKGn.DE) are acting for Rio. Lehman and China International Capital Corp are advising Shining Prospects.

(Additional reporting by Anshuman Daga, Laurence Fletcher, Miyoung Kim, Sebastian Tong, Eleanor Wason and Adrian Croft in London, James Regan in Sydney and Tony Munroe and Polly Yam in Hong Kong; Writing by Mark Potter; Editing by Louise Ireland)

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