17th June 09 - The one that got away

It is hard to keep China out of the news especially as the credit crisis reaches some form of mature phase. From its huge internal stimulus packages of infrastructure programmes, through overtaking Japan as the world’s second largest economy, via its increasingly dominant currency to its great ambition to secure supplies of the raw materials it continues to need to fuel its growth. Yet, just two weeks after the 20th anniversary of the Tiananmen Square massacre (the "incident"), one has got away.

Some fourteen months ago a state-owned group named, not surprisingly, Chinalco, made a move on the leading FTSE mining and exploration company called splendidly Rio Tinto. This is no under the arches business. It has a market capitalisation of £29bn and turns over US$29bn. A long geo-political and regulatory saga unfolded and earlier this year it culminated in Chinalco acquiring 18% of its target. This stake cost $19.5bn of cash injection to ease Rio’s massive debt still standing at $38bn and the impending deal would have allowed the Chinese behemoth to take minority stakes in some of Rio’s mines. It was this aspect that put certain countries in alert mode. Uppermost in the cautious camp was Australia where many of the biggest mines are located.

Up pops the Australian giant miner BHP (that used to be known as Broken Hill after its biggest site) and tries to take over Rio to form such a large miner as to arm the commodity supply chain against even the dominant customer called China. It could be added that the cause of Rio’s debt vulnerability was its earlier purchase of Canadian Alcan at the top of the market in 2007 and employing in full measure our old friend Goodwill.

The story all along from Rio has been that its investors could not stump-up enough cash to ease its debt burden and so its cap-in-hand approach to or by Chinalco was the best strategy. But, Rio’s share price has risen by 86% in the last four months and commodity prices that had been on the slide have steadied off. The end game is that the Rio board has caved in and bowed to shareholder power (remember the Barclays story that only this week has fed massive profits to the Middle-Eastern investors that moved in when the ordinary shareholders were denied pre-emption rights) and there is to be a rights issue and a joint venture with? You guessed it, BHP.

One consolation for Chinalco is a $195m break fee. The one that got away - but not entirely free, mate.