China takes stake in Rio, threatens BHP bid plan

By Eric Onstad and Lucy Hornby

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.