Alan Kohler
Rio's China crisis
Rio Tinto is now at the mercy of BHP Billiton. Having bungled its escape plan, and in the process disastrously compromised its relations with China as well as its own shareholders, Rio has nowhere to go but into the arms of its rival.
It is very difficult to see how chief executive Tom Albanese can continue in his job, even as a caretaker pending the negotiation of a deal with BHP.
The new chairman Jan du Plessis has had to undergo the rather confronting experience of hearing institutional investors tell him that the man who quit as chairman after three weeks, Jim Leng, thus catapulting him into the job, was right – the Chinalco deal was a shocker, negotiated in the company’s darkest hour, and Rio should always have trusted its shareholders and asked them for the money instead. But at least du Plessis has listened, and acted, now.
Business Spectator’s Robert Gottliebsen has explained in detail why the Chinalco deal should have been abandoned (Rio-Chinalco smoke and mirrors, March 25), but there is one overriding reason it should not have been attempted in the first place – the risk of a major breakdown with the company’s largest customer – China – was too great. And now that has happened.
There must now be a kind of three-way negotiation between BHP, institutional shareholders and the European competition commissioner, Neelie Kroes. The first two groups will, in a sense, divide Rio up and Kroes will be arbiter of that division.
A full, 100 per cent takeover of Rio by BHP, and in particular the complete combination of their iron ore interests, was never going to be possible – the EU’s competition commission was always going to require some assets to be divested, even if it were just Robe River.
So there must now be a discussion about how much BHP will be allowed to have of Rio, and therefore how much debt can be repaid by selling assets to BHP, and which assets will be left in Rio to be recapitalised by a rights issue.
It is unlikely that this can be sorted out overnight. BHP’s Marius Kloppers and Don Argus must name the assets they want and their price, a new application must be made to Neelie Kroes and the ACCC in Australia, and the size of a rights issue decided.
Rio can perhaps announce an indicative, maximum rights issue to provide some market certainty, but the final figure should await the completion of negotiations with BHP.
The Rio debacle has probably changed a few things permanently. For a start, boards will think twice before ignoring their shareholders on the subject of recapitalisation, especially if the alternative is giving up effective control to customers.
And it will take a long time for the Chinese to get over this. Their offshore expansion ambitions have been dealt a humiliating blow, which they will not easily forgive.
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