Raise a glass of SA red

This deal was worth the 10-year wait

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­week.co.za

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

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