Rio-Chinalco deal takes a twist as Merrill enters

23 May 2009

On the backdrop of Rio Tinto shareholders clamouring for a revised deal with Chinalco, or some even call for dumping the deal altogether, Merrill Lynch has joined the bandwagon, calling for a rights issue to fix Rio's debt.

In a report to clients on Friday, Merrill said a rights issue would be less dilutive than the Chinalco deal as it now stood. The earnings per share (EPS) dilution for a $10 billion rights issue of about 13 per cent on 2010 EPS forecasts was down from 21 per cent on the same calculations back in February, the report said.

The Rio-Chinalco deal had been attracting objections from various quarters, including the opposition parties as well as the shareholders, since it was signed in February.

 Cash-strapped Rio, which has almost $40 billion of debts, has to meet the October deadline to repay a $8.9 billion bond. This has prompted the company to opt for a capital injection from Chinalco, which promised the beleaguered miner $19.5 billion. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent)

However, Rio's share prices started picking up from its abysmal depth at the beginning of the year when the deal was signed.

''The share prices have almost doubled since the deal with Chinalco was announced in February,'' the report noted.