Chinalco and Alcoa gatecrash BHP's £65bn bid for Rio

By Danny Fortson, Business Correspondent
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China's state-owned aluminium company gatecrashed BHP Billiton's £65bn takeover bid for rival Rio Tinto yesterday with a brazen dawn raid in which it bought a 9 per cent stake in the company and a strong foothold in the consolidating mining industry.

In a move that came just five days before BHP must table a formal offer for Rio or walk away, Chinalco and Alcoa, the American aluminium giant, paid £60 per Rio share – well above the price offered by BHP – in a co-ordinated global share-buying spree. The move, the largest cross-border investment ever done by a Chinese company, caught Rio and BHP off guard. The latter's shares surged on the news as investors who had worried that BHP would overpay for Rio interpreted the development as the death knell for its bid.

Xiao Yaqing, Chinalco's president, denied that the share raid was an attempt to block a BHP takeover, insisting that its proximity to the "put-up or shut-up" deadline was simply a "coincidence in timing." As the world's leading consumer of iron ore, aluminium, copper and several other commodities, China has an interest in seeing BHP's ambition to take out one of the country's main suppliers fail.

Mr Xiao said he received Chinese government approval before he did the deal but that it was not done at the state's behest. "The Chinese government has made it very clear that it will not interfere in the commercial decisions of its state-owned companies," he said. "All decisions made by Chinalco are made on a commercial basis."

Instead, he said the principal motivation for the move was his desire to diversify Chinalco into an integrated metals and mining company, beyond its current dependence almost entirely on aluminium.

Yet Chinalco's dramatic entrance into the BHP-Rio takeover saga left the market confused. Using a bid vehicle called Shining Prospect, it and Alcoa as a minor partner paid £7bn for 12 per cent of Rio's London-traded shares. After taking into account Rio's listing in Australia, that stake falls to about 9 per cent of the entire entity.

Rio Tinto chairman Paul Skinner seized on the premium paid to reiterate the company's view that BHP's offer is too low. He said: "This unsolicited development reinforces our view of the long-term value of Rio Tinto."

Tobias Woerner, an analyst at MF Global Securities, said the move would serve as an impetus for BHP to table a bid next week that is a significant improvement on its proposed three-for-one share swap. "The heat is on BHP Billiton to react," he said. "Walking away is not an option at this stage... especially given its pole position in terms of synergy potential." He said that given BHP's share price rise yesterday to 1595p, if it upped the offer ratio to 3.5-to-one plus £6 in cash, it would value Rio at £62 per share, above the price Chinalco paid. BHP declined to comment.

The 9 per cent holding is not big enough to block a BHP bid, though it is presumed that with the Chinese government as its main shareholder Chinalco has access to limitless funds. The company said it reserved the right to make a full takeover offer if BHP does so, though Mr Xiao sought to downplay that possibility.

At the very least, the move gives China a seat at the table in the consolidating mining industry at a time when the raw materials it needs to fuel its round-the-clock building boom are of critical importance.

The inclusion of Alcoa in the deal led some analysts to assume that the ultimate goal is a break-up of Rio. Alcoa last year lost out in the race to buy its Canadian rival Alcan, after being outbid by Rio. If Chinalco launched a breakup bid, Alcoa would be in prime position to pick off the choicest assets it lost out on last year.

Michael Rawlinson, an analyst at Liberum Capital, said: "We think a 12 per cent position is too small for a blocking stake and the involvement of Alcoa indicates to us that this isn't a situation of buy, block and hold a passive stake in Rio Tinto. Rather it is likely Chinalco, Alcoa and the Chinese [government] are aiming for an ultimate break-up bid of Rio Tinto."

The Australian government would be likely to oppose a Chinese takeover of Rio.