Rio Tinto shareholders continue to oppose Chinalco deal

06 March 2009

Embattled Rio Tinto chief executive officer Tom Albanese is finding out that convincing shareholders from the dual-listed company miner - Rio Tinto Plc of Britain and Rio Tinto Ltd of Australia - of the merits of its proposed $919.5-billion tie-up with the Chinese state-owned aluminium producer Chinalco is a difficult balancing act.

Under the DLC structure the British and Australian arms retain separate legal identities but are treated as if they are one combined entity, with the shareholders of both companies having a common economic interest in all the assets. There is considerable dissatisfaction with the deal in both Rio companies, but the focus is different in each case.

In Britain, the main issue is "pre-emption" rights: shareholders must be treated equally. They feel that one shareholder has been given undue preference over the others.

The Chinalco proposal is twofold - payment of $7.3 billion for convertible bonds which, on conversion, would give the Chinese group 19.9 per cent of Rio Tinto Plc, and 14.9 per cent of Rio Tinto Ltd, which equates to a blocking stake of 18 per cent of the combined entity, and $13.2 billion for minority interest in some of Rio's prime assets in iron ore, aluminium and copper.

Rio has almost $40 billion of debt after the overpriced acquisition of aluminium producer Alcan, with $20 billion repayable by the end of 2010. Rio says it wanted a deal that would fix its balance sheet for the next two years, and that if it had opted for the rights issue, and the global economy downturn continued, it may not have been able to sell enough assets to satisfy debt repayment obligations.

Albanese's attempts to placate angry British shareholders forced him to delay his visit to Australia, but he is there now and trying to allay concerns. And he is finding that the concerns here are very different.