labels: M&A
Rio may issue $7.2 billion bonds to existing shareholders news
21 May 2009

Rio Tinto might replace a $7.2-billion convertible bond sale to Chinalco with a capital raising to existing shareholders, says a newspaper report, adding that Rio Tinto is talking with institutional shareholders in the UK and Australia about the possibility of a capital raising.

The Chinese aluminium giant is prepared to underwrite the issue, and scrap a contractual claim to 30 per cent of Rio's iron ore production but would not concede on its planned stakes in Rio assets or on its right to appoint two directors to the board, the Sydney Morning Herald newspaper said.

Under the agreement signed in February, the Chinese-owned company would pay $12.3 billion for stakes in Rio's iron ore, copper and aluminium assets, as well as $7.2 billion for convertible bonds that would double its equity interest to 18 per cent. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent).

The paper says Rio Tinto has told Chinalco that the changes were planned because of shareholders unwillingness to support the deal.

Separately, The Australian Financial Review reports that Rio Tinto, BHP Billiton and Brazilian resources giant Vale are believed to be negotiating with Japan's Nippon Steel and South Korea's POSCO on iron ore prices in Seoul this week.
However, the opposition is still not convinced of the proposed changes in the deal.(See: Chinalco-Rio Tinto deal fuels political storm).

''The changes don't remove concerns that an arm of China's communist party will still be getting too much control of Rio, which has a third of its assets in Australia,'' said senator Barnaby Joyce.

''We have the problem that what is the structure of the deal,'' Joyce said in a TV interview. ''We still have the same problem that the resource in situ in the ground is owned by another nation's government inside our nation. That is the problem.''

''Pressure is mounting immensely on Prime Minister Rudd,'' Joyce said. ''You have to ask: 'should the sovereignty of your nation pass to another nation by reason of acquisition?'''

Chinalco's willingness to negotiate coincides with vigorous discussions at the Foreign Investment Review Board (FIRB) in Canberra, which is due to rule on the deal by June 15.

The final deal would then need to be approved by Beijing. The outcome will heavily influence dozens of cashed-up Chinese companies considering investing in Australia and elsewhere.

According to media reports, Chinalco has no objection to FIRB conditions that might include raising the number of Australian directors from three (including one dual-passport holder), requiring certain executives to reside in Australia, or specifying a number of board meetings to be held in Australia each year.

The February deal was originally structured to satisfy guidelines from Swan and the FIRB. But Chinalco and Rio appear to have underestimated the political sensitivity of Chinese investment in Australian resources.

Rio said the company will use the capital injection from Chinalco to help tackle the $38 billion debt it incurred by buying Canadian aluminium producer Alcan Inc in 2007.

Rio chairman Jan du Plessis is talking to shareholders in London and will then conduct meetings in Australia. He has said he doesn't intend to put the deal to a shareholder vote if he thinks it will be defeated.

The institutional shareholders have been raising concerns over the deal saying that the global economic scenario has changed after the first agreement with Chinalco, and Rio's share price has been on the rise in recent months. Some of them even prefer a deal with BHP Billiton to Chinalco. (See: Rio Tinto may not tango with Chinalco).

Rio's share price in Australia has risen 25 per cent since the deal with Chinalco was announced on February 12, and closed Wednesday at A$64.79 on the Sydney Stock Exchange.

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Rio may issue $7.2 billion bonds to existing shareholders