It was Rio Tinto's decision to leave China's Chinalco group at the altar and accept a $US5.8 billion iron ore marriage proposal from BHP Billiton that captured the headlines early last month, but the second leg of Rio's switch, a $US15.2 billion share issue, was actually more important.
Without it, Rio could not fully replace the $US19.5 billion it would have received from Chinalco by selling shares in Rio itself and stakes in key Rio assets, and it was absolutely essential that it do so, to defuse the $US40 billion debt time bomb it created when it overpaid for Alcan in 2007, just as the global financial crisis was beginning.
Today's news that the UK portion of the giant share sale has been overwhelmingly supported will be followed tomorrow by an announcement that shareholders in the Australian arm of the dual-listed group have also rushed the deeply-discounted share offer, and it marks the end of the first phase in what will be a longer recovery program.
Rio knew it had the dough: the UK and Australian legs of the share issue were both fully underwritten by JP Morgan and Credit Suisse. The investment banks were comfortable too, because the offer was priced to succeed, at a discount of 48.5 per cent to the-then maerket price in Australia, and 57.7 per cent in the UK.
The UK result and the one that will be confirmed here tomorrow nevertheless signal the formal end of a period of intense pressure on Rio, and, importantly, jilted 9 per cent shareholder Chinalco is among the holders of 96.97 per cent of Rio UK shares that took up the offer.
Chinalco was angry about being dumped by Rio, but clearly sees long term value in its stake, which now has a lower average cost. Chinalco maintains its stake at 9 per cent, and boosts the number of shares it owns by by a third at a mere 23 per cent of what it paid on-market early last year for its original foothold.
More generally, the big Rio shareholder acceptance rate signals an easing of shareholder dissatisfaction with the way Rio has been conducting itself.
The group's deal with Chinalco was to include an exclusive issue of convertible bonds to Chinalco: Rio shareholders in the UK in particular were very unhappy about that, and argued strongly that the group should have made a general issue to its shareholders. They got what they were asking for, and they have supported the issue.
Rio still has a way to go to rehabilitate itself completely, however. Its Alcan acquisition leaves it heavily exposed to aluminium, which is in over-supply, and the joint venture on iron ore with BHP that will swing another $US5.8 onto the balance sheet must still be definitively agreed by Rio and BHP, and then approved by regulators.
It is no certainty. Iron ore customers oppose it, and the European Commission, Europe's equivalent of our ACCC, will look at it very hard. The final nods, if they come, are unlikely to happen until next year.
mmaiden@theage.com.au
The Age
