Rio seeks new ways to take sting out of fundraising

By William MacNamara in London

Published: May 3 2009 22:26 | Last updated: May 3 2009 22:26

Rio Tinto is exploring ways to alter its $19.5bn fundraising move with Chinalco to ensure that the deal’s basic structure wins approval from regulators and shareholders when they review it in June.

Since the deal was proposed in mid-February, shareholders in the Anglo-Australian mining group have strongly opposed one component of the deal: a $7.2bn convertible bond offered to Chinalco that would raise the state-owned Chinese miner’s stake in Rio to 18 per cent, but dilute other Rio shareholders.

Approval of the deal package in outline – part bond issue, part asset sale, for a transaction value of about $20bn – is so important to both sides that they are considering all answers the question: “What will make this an acceptable transaction?” according to a source close to the deal.

It is thought that Chinalco would be amenable to a watered-down version of its convertible bond. A new bond would allow for some degree of UK and Australian shareholder participation.

Under one compromise scenario, Rio could offer Chinalco convertible bonds worth 5 per cent of the company’s share capital, instead of the roughly 8 per cent currently on offer.

A company’s right to issue shares worth 5 per cent of its enlarged share capital without shareholder approval is recognised under UK law. 

Rio maintains that it needs funds of about $20bn to pay off debts due for payment over the next two years. If it reduced the value of the convertible bond offered Chinalco to about 5 per cent of share capital, it would be likely to offer the remainder – 3 per cent or 4 per cent of share capital, valued at about $3bn – to current shareholders.

No decision has yet been made on any form of compromise. The key arbiter is Chinalco. Since February, Rio shares have almost doubled in value to £28.50 per share in London, just shy of the £30 threshold needed for Chinalco to convert its first $3.1bn tranche of Rio bonds to Rio shares.

This makes the convertible bond look more like an investment coup for Chinalco, essentially giving it underpriced rights to almost double its 10 per cent stake in one of the world’s bluest-chip companies before the year-end.

According to several sources, Chinalco has always been most interested in the $12.3bn asset-sale component of the deal. Rio proposes to sell Chinalco minority stakes in copper, iron ore and aluminium assets around the world.

Meanwhile, BHP Billiton , the world’s biggest miner, is waiting in the wings. If the Chinalco deal falls apart or evolves, it is prepared to step in with its own offer to buy some of Rio’s top-tier assets.

Rio investors have noted that Tom Albanese, the company’s chief executive, is looking more isolated as he attempts to steer Rio through its second epic battle in his two-year tenure.