Rio Tinto shareholders cast longing eye at BHP

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The Independent Online

Major Rio Tinto shareholders would prefer a tie-up with its rival BHP Billiton to the miner's controversial $19.5bn (£12.8bn) deal with the Chinese state-owned Chinalco.

The Chinalco proposal sparked warm words from shareholders when it was launched in February for riding roughshod over investors' pre-emption rights. But Rio's rocketing share price – which has nearly tripled in the past five months – is now putting even greater pressure on the deal. Not only is the price of debt now below the interest on Chinalco's $7.2bn convertible bonds, but the rising share price has eaten any conversion premium.

The China proposal was born from Rio's need to pay down its $40bn debt mountain, of which $8.9bn is due this year and $10bn next. But with the share price back near 3,000p, from a 1,049p nadir in December, there is growing agitation for a straight rights issue.

Meanwhile BHP Billiton, the larger rival that dropped its hostile takeover bid in November because of Rio's debts, is tipped to make a return. Analysts are speculating on a range of possible scenarios, including a takeover bid and an underwriting of a Rio rights offer. Speculation in the market favours a price of 2.5 BHP shares to every one from Rio.

A source at one major shareholder said yesterday: "Both we and other Rio investors would prefer a BHP-related solution rather than a Chinalco one and as a minimum the existing Chinalco terms would have to be improved."

Rio's management has expressed resolute commitment to the deal since it was first announced. But the audience at a major mining conference in Barcelona earlier this week detected less enthusiasm than usual from Tom Albanese, the Rio chief executive. Michael Rawlinson, at Liberum Capital, described the transaction as "in the critical ward".

In Australia, where Rio is also listed, the deal has also caused an uproar, although the Sydney shares have dropped sharply in the past two days on rumours that it is to ditch the Chinalco plan. The main Canberra opposition party has promised to veto the deal and one senator took out television ads calling for it to be blocked. The Foreign Investment Review Board will report in June.