Raise a glass of SA red
This deal was worth the 10-year wait
AT LONG LAST Rio Tinto and BHP Billiton are going to co-operate to ensure Australia’s massive iron ore reserves don’t fall in part into Chinese hands. It may be that the calm head of new Rio Tinto chairman Jan du Plessis and the dynamic approach of BHP Billiton CEO Marius Kloppers have now made the deal possible after 18 months of wrangling. Those two native South Africans probably also share the passion of drilling Australia on the rugby and cricket fields and of sharing a glass of red wine from the Cape on it.
Late in 2007 BHP Billiton shocked the world’s steel consumers – especially China – with an offer of 3,4 Billiton shares for every Rio. That would at the time not only have been the world’s largest-ever mining transaction but also one of biggest mergers of all time. It would also have created a world mining giant controlling dangerously close to too much of the world’s iron ore.
Kloppers preferred throughout to call the transaction a merger. Rio Tinto chairman Paul Skinner and his equally resolute second in command – CEO Tom Albanese – told all who’d listen (there weren’t many) that Rio Tinto was worth much more.
Though Kloppers spent virtually the whole of last year trying to make the deal work, in the end Billiton withdrew its offer in November.
The graph plots the relationship of Rio and Billiton’s share prices over the past two years – and it shows just how arrogantly wrong Skinner and Albanese were. Billiton’s offer of 3,4 of its own shares for every Rio was something that Rio’s board should have grabbed.
It’s easy to be wise after the event, but remember Rio was/is also rotten with debt after having paid too much for Alcan. When the shortage of credit began reaching crisis proportions in mid-2008, Rio was almost in serious trouble when Billiton withdrew its offer in November.
The graph shows that Rio’s and Billiton’s share prices were more or less the same in December 2008 (after Billiton had offered 3,4 of its shares for every Rio a year earlier).
With Rio deeply in trouble, its management did what it thought best and looked to China for help. China’s Chinalco was ready to save Rio from its desperate debt
position with an investment of US$19,5bn in exchange for Rio’s iron ore interests in Australia. Rio’s shareholders were very bitter about that and it was a huge embarrassment for Australia’s politicians.
Quietly, British American Tobacco chairman Du Plessis – one of the big gun companies on the London Stock Exchange that was also listed on the JSE last year following the unbundling of Remgro out of Richemont – was appointed Rio Tinto’s new chairman.
Skinner, who seems to have devoted his chairmanship of Rio to seeing how much debt he could build up, disappeared from the scene equally quietly.
Last week, BHP Billiton and Rio announced they’d found enough common ground to co-operate in the further development of their huge iron ore interests in Australia. Billiton is helping out with cash and is also helping Rio’s planned huge issue of new shares. If all goes well Rio’s new chairman could be looking at a balance sheet from which debt is rapidly diminishing, just as he’s been able to do during his 10 years at BAT.
The Chinese are angry and Chinalco is wondering whether it wants to have any future dealings with Rio and Billiton and is also not yet keen to follow its rights issue in Rio. Investors and shareholders in both companies are extremely bucked and each one’s share price is still rising smartly. The cost of insuring Rio’s debt has fallen sharply from 390 basis points to 290.
CEO Albanese will keep his job, though the Chinese excursion is costing Rio more than $1bn. Schroders plc, Rio’s largest shareholder, apparently decided to give Albanese another chance. “It’s a commercial matter and I think it’s very important our friends in China focus on that fact,” says a very relieved Australian Prime Minister Kevin Rudd.
Let’s hope that somewhere a glass of good red wine, preferably South African, will be raised to toast Marius Kloppers’s remark that “this deal has been 10 years in the making and is well worth the wait”.
In any case, red wine is best after 10 years.
Cool, calm and collected. Jan du Plessis
Nothing but a merger. Marius Kloppers