Is China Making a $134B Bid for Rio Tinto?

♠ Posted by Emmanuel in ,, at 12/05/2007 01:05:00 AM
OK, this is getting a little confusing. Initially, the newly created sovereign wealth fund the Chinese Investment Corporation (CIC)--unfortunately best known for its el crappo "investment" in private equity fund the Blackstone Group--was rumored to be interested in buying Melbourne-based mining titan Rio Tinto. Before that, BHP Billiton, the world's largest mining firm also headquartered in Melbourne, mounted a $120B hostile bid for Rio Tinto, the third largest one. Supposedly, CIC was mulling an offer, though the official Chinese news agency Xinhua denied that such an offer was forthcoming. From 11/27:
China Investment Corporate Ltd (CIC), the country's newly launched state foreign exchange investment company, said in a statement Monday that it had never been involved in a bid for Rio Tinto. The statement was intended to dispel market rumors started by a report in Chinese weekly newspaper China Business saying the CIC was leading a group of Chinese steel makers in a bid for Rio Tinto.

On Monday, Rio Tinto also denied reports of a bid from China Investment.

Australia's BHP Billiton, the world's largest mining company, is proposing to buy its rival Rio Tinto, the world's number three miner, for more than $120 billion. BHP Billiton's share price surged 1.84 dollars to 42.11 dollars, while its takeover target Rio Tinto skyrocketed 9.6 dollars to 138 dollars on the Australian stock market on Monday, amid speculation of a rival bid from China. The proposed merger between the world's two leading mining groups has aroused concerns over their combined market power over iron ore.

The CIC was launched in September to mitigate the risks in China's huge foreign exchange reserve. It has $200 billion in registered capital allocated from the reserve.

Well, guess what: now Bloomberg notes that the Chinese are likely interested in mounting a $134B offer via Baosteel, which is, alike CIC, ultimately a state-owned enterprise. Now, $134B may seem like an incredible sum to you and me, but it's probably, oh, ten minutes' worth of reserve accumulation for China [just kidding]. What difference would it make if CIC or Baosteel mounted the bid? With sky-high commodity prices at the moment, it seems like China would be buying at the top just as it did with Blackstone before global market liquidity dried up.

As you will read below, the supposed logic behind an offer is that Chinese steelmakers are wary that a BHP Billiton-Rio Tinto combination would concentrate too much supplier power as it would control 38% of the shipborne iron ore trade. China is said to import over half of its iron ore, with Baosteel importing 95% of its supply so this is not a trivial matter for the resource-hungry Chinese industrial machine. Even if such a bid fails, it raises the bar that BHP Billiton must reach to make a competitive offer, to the advantage of the Chinese. Of course, there are big questions over whether the Australian government would let a key cog of its industrial machine go to Chairman Mao's acolytes...
Chinese steelmakers, the largest buyers of iron ore, and the government are studying a joint bid for Rio Tinto Group to counter a $134 billion offer from BHP Billiton Ltd.

``It's an issue being discussed by top-level officials,'' said Chen Hanyu, a director at the resources office of Beijing- based Shougang Corp., the nation's ninth-largest steelmaker. Members of the China Iron and Steel Association have held talks, Vice Chairman Qi Xiangdong said in a telephone interview.

The steel mills want to block BHP's offer because the deal would give the world's biggest mining company control of almost half the Asian market for iron ore. Rio's London shares are trading at a 14 percent premium to BHP's all-share proposal, indicating investors expect a higher offer. Any acquisition by China would dwarf Cnooc Ltd.'s failed $18.5 billion bid for Unocal Corp., rejected by U.S. lawmakers in 2005.

``There are clear strategic reasons why they would consider'' a bid, Angus Gluskie, who helps manage the equivalent of $500 million at White Funds Management, including shares of London-based Rio and BHP, said in Sydney. Australia's newly elected Labor Party government may oppose such a transaction, he said.

Baoshan Iron & Steel Co., the listed unit of China's largest steelmaker, rose 5.2 percent to close at 15.53 yuan in Shanghai. Rio, the world's third-largest miner, gained 72 pence, or 1.3 percent, to close at 5,515 pence on the London Stock Exchange. Seven of the eight other stocks in the Bloomberg Europe Metals & Mining Index dropped. Rio has more than doubled this year in London.

China has been scouring the world for resources. Aluminum Corp. of China bought Peru Copper Inc. for $860 million in August, Anshan Iron & Steel Group in September agreed to a A$1.8 billion ($1.6 billion) Australian iron-ore joint venture, and Cnooc last year spent $2.7 billion buying Nigerian oil fields.

A bid ``is pretty positive for China's steelmakers,'' said Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai. ``The control of raw material costs makes sense.'' Baosteel Group Corp., the nation's largest steelmaker, and domestic rivals are studying a bid, the 21st Century Business Herald said today, citing Baosteel Chairman Xu Lejiang. Fan Shunbiao, a spokesman for Baosteel, said he's not aware of any talks on a bid. Amanda Buckley, a Melbourne-based spokeswoman for Rio, declined to comment today. Samantha Evans, a Melbourne-based spokeswoman for BHP, also declined to comment.

``Chinese steelmakers, if united, are capable of making such a bid,'' said Lu Yizhen, who helps manage $640 million at Citic Prudential Fund Management Co, in Shanghai. ``It's also likely that steelmakers want to influence the shares of Rio, blocking BHP's bid.''

Chen Bin, director of the industrial department of the National Development and Reform Commission, which supervises China's steel industry, said the commission isn't involved in any Rio bid proposal. ``A few of the biggest steelmakers in China and the central government may team up for the bid,'' Shougang's Chen said today in an interview. Chinese steelmakers have the financial ability to bid for Rio and are awaiting for a decision from the government, Zhao Kun, vice president of Baosteel, in charge of merger and acquisitions, said Nov. 26.

A five-year increase in metal prices has spurred about $185 billion of bids in the industry in the past year, according to data compiled by Bloomberg...``It's almost an open secret that China wants to secure more overseas resources assets,'' said William Fong, who helps manage $6.8 billion of Asian equities at Baring Asset Management Asia Ltd., in Hong Kong. ``BHP's bid for Rio is probably a trigger.''

Chinese companies have grown more acquisitive. The Industrial and Commercial Bank of China Ltd. is buying a 20 percent stake in Africa's largest lender Standard Bank Group Ltd. for 36.7 billion rand ($5.4 billion), the country's largest overseas purchase. Ping An Insurance (Group) Co. last month bought a 4.2 percent stake in Fortis, Belgium's largest financial services company.

Australia's previous coalition government blocked Royal Dutch/Shell Group's proposed takeover of Woodside Petroleum Ltd. in 2001. Cnooc, China's third-largest oil producer, was blocked from buying Unocal Corp. in 2005 by U.S. lawmakers. ``There has always been a strong nationalistic viewpoint held by the Labor Party that supports Australian ownership of its resources,'' said White Funds' Gluskie.

Rio's Chief Executive Officer Tom Albanese has told investors BHP's three-for-one stock proposal undervalues his company. BHP and Rio would together control 38 percent of the global seaborne iron ore trade, according to the Australia & New Zealand Banking Group Ltd., rivaling the largest producer Cia. Vale do Rio Doce.

``Chinese steelmakers are so fragmented, putting them in a weaker position when negotiating with giant iron ore suppliers,'' Helen Wang, a Shanghai-based analyst at DBS Vickers Hong Kong Ltd., said by phone today.