Over the next few months, the Australian Financial Investment Review Board (FIRB) will have a tough job deciding whether it is in Australia’s best interest to approve Chinalco’s acquisition of more than 14.9% of Rio Tinto shares. A crucial task for the Australian regulator is to determine whether or not this share acquisition is a genuine business decision. So far no one is convinced that this Chinese Aluminium Group is just after some aluminium asset. There is strong evidence to suggest that the bid is designed to influence the outcome of a possible BHP and Rio Tinto merger.
The timing of the acquisition is a dead giveaway. The dawn raid on 1 February was just a few days ahead of the UK Takeover Panel’s deadline for BHP Billiton to formalise its takeover proposal. This left BHP Billiton with less than a week to make alternative plans to accommodate the changes. The conglomerate led by Chinalco paid a staggering GBP60 per share for 12% of Rio Tinto’s UK-listed arm (or 9% of the whole company). It has effectively put a 21% premium on BHP Billiton’s original offer of around GBP50 per Rio Tinto share. BHP Billiton’s failure to match the increased price gave Rio Tinto an excuse to reject a revised offer, even though the offer was increased from three-for-one to 3.4 BHP Billiton shares per Rio Tinto share.
The dawn raid was carefully orchestrated to hide traces of intervention from the Chinese Government. The reason for choosing a US aluminium giant Alcoa as a comrade in combat is quite obvious. However, the using of Chinalco as a vehicle to launch a raid deserves some explanations. The official Xinhua Chinese news release (which is significantly different in content and focus from the English version of the report) provides a glimpse of the rationale. This report cites several reasons why the widely anticipated counter bid from Baosteel, China’s largest steel manufacturer, fails to come through. The steel industry in China is still dominated by small operators that scatter throughout the country. These companies have neither the international experience nor the financial resources to compete in mega-scale takeover bids. A Chinese steel manufacturer that openly competes in the international market for upstream resources will easily become a target for criticism; its effort to secure cheap iron ore will tip the balance of the supply chain and will be construed as breaking the rules of free trade practices. Nevertheless, “China must take necessary action to block the BHP-Rio merger”, according to the Xinhua report. Chinalco, with a market value of over US$50 billion, is considered as the best vehicle for launching a counterbid. Chinalco’s status as the world’s second largest manufacturer of aluminium oxide, the third largest manufacturer of electrolytic aluminum and the fifth largest producer of aluminum processing material, together with its vast experience in international business ventures, will make it a convincing contender for a slice of the world’s third largest mining company.
Michael Sheridan of Sunday Times is correct when he describes how Beijing shows its hand in this battle to block the BHP-Rio merger:
The coup was widely seen as a riposte to a bid by Australia’s BHP Billiton to acquire Rio Tinto. China is believed to fear the emergence of a titan that would be able to dictate quasi-monopoly prices for commodities vital to its interests.
Yet Chinalco’s suave 49-year-old president, Xiao Yaqing, told people in London and Sydney that it was a purely commercial investment whose objective “is to make a return”.
Chinalco’s attempt to distance itself from hints of politically motivated sovereign investment were undercut by the fact that the Chinese foreign minister, Yang Jiechi, also appointed himself a de facto spokesman for the deal, while insisting it was a matter for the company alone.
Chinese business journalists say that is nonsense. Chinalco is a state-owned entity and its president, Xiao, is a politically sound appointee who has the approval of the State Council, which is China’s cabinet.
Funds for the Rio Tinto investment are reported to have come, in part, from China Development Bank, about whose status there is no doubt. It is a state-controlled financial institution that also answers to the State Council.
“Nobody would dare to make a strategic decision like this without absolute approval from the leadership,” a Chinese investment banker commented.
The FIRB will take a closer look at the ownership structure of Chinalco when the Board is weighing up the effect of Chinese investment in Rio Tinto. Their findings will alert China’s major trading partners to issues of sovereign investment and state intervention that characterise China’s half-hearted shift to a market economy.