Rio to pay over $600 million in rights, break fees

LONDON (Reuters) - Rio Tinto's switch to a $15.2 billion rights issue and joint venture with one-time suitor BHP from a planned tie up with Chinalco will cost it over $600 million in fees and payments to advisers.

Rio will pay roughly $418 million, a standard 2.75 percent fee, to banks handling the biggest rights issue ever from a non-financial firm, according to banking sources.

That would be in-line with HSBC's $19 billion rights issue in April.

The world's third biggest miner also has to pay Chinalco $195 million as a break-up fee for walking away from the deal it struck four months ago.

The $613 million price tag would be equivalent to 13 percent of Rio's estimated 2009 net profit of $4.7 billion, according to IBES.

"This is the price they have to pay to generate the deal," said UBS analyst Peter Hickson. The rights issue will allow shareholders to retain key resources assets and the BHP joint-venture is value creating,"

UBS analysts expect Rio's earnings per share to be diluted by 17 percent in 2010 to $3.72 per share due to the rights issue, slightly higher than the Chinalco tie-up, which would result in a 15 percent earnings dilution, according to UBS.

"The old Chinalco convertibles would never have made sense based on the current Rio share price," one London-based banker said.

The convertible bond's strike price of 3,700 pence was 79 percent above Rio's share price when the deal was announced in February. Improving market sentiment, however, sent Rio shares up more than 50 percent since and reduced the premium to 23 percent.

Shareholders said Rio management had no choice but to ditch the Chinalco deal.

"The worst thing for Jan du Plessis would have been to go ahead for the deal and have it voted down by shareholders," said one top 20 investor who wanted to remain anonymous.

The offer period for the rights issue, arranged by JPMorgan Cazenove, Credit Suisse and Macquarie, will run between June 17 and July 1.

(Editing by Dan Lalor)