Investors Must Get Active to Force Change of Heart at Rio

Will BHP Billiton ride to the rescue of disgruntled Rio Tinto shareholders? UBS set hares running this week with a research report suggesting BHP could yet offer an alternative to the proposed $19.5 billion tie-up with Aluminum Corp. of China, or Chinalco. Such a deal would meet all of Rio's financial objectives without taking the ill-judged strategic step of allowing its biggest customer into its boardroom. But Rio investors can't passively sit back and hope the board walks away from the Chinese deal on which it has staked its credibility. The market recovery may have removed one of the main justifications for the deal, the need to refinance $19 billion of Rio's debt by the end of next year, but the board still is committed to reducing Rio's high leverage. The combination of a rights issue plus a deal with BHP could do that, too. BHP is keen to buy out Rio's 30% stake in Chilean copper mine Escondida. Meanwhile, a deal that combined the two group's neighboring iron-ore assets at Pilbara in western Australia could deliver huge synergies, estimated by UBS to be valued at $8 billion to $10 billion. Indeed, these cost savings were the cornerstone of BHP's bid for Rio last year. The snag is that the Rio board doesn't seem interested in talking to BHP. It can argue that working out the price, ownership and management of a Pilbara merger or joint venture wouldn't be easy. Marketing the iron ore might have to be kept separate for antitrust reasons. At least the Chinalco deal offers certainty. Instead, it has focused on trying to modify the Chinalco deal to appease various shareholder groups and the Australian politicians who could yet block the transaction. New Chairman Jan du Plessis has been meeting investors to try to find a solution. U.K. shareholders, angry at the loss of their pre-emption rights, might be bought off with an offer to participate in the convertible bond offered to Chinalco. And Australian political sensitivities might be appeased by a deal that gave Chinalco less influence in the Rio boardroom and less say in the marketing of Rio's Australian iron ore. As things stand, the Rio board's Chinese deal looks likely to prevail. Shareholder pressure likely would be required to force it to talk seriously with BHP about an alternative option. But Rio investors, spread across several continents, have proved unable to work together. In the bull market, an activist might have emerged to rally investors. Rio could do with one now. source：online.wsj.com