Rio Must Change Chinalco Offer to Win Approval, Merrill Says

May 22 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, should change the $19.5 billion investment deal with Aluminum Corp. of China to win approval as credit and metal markets have improved, Merrill Lynch & Co. said. “Any deal put to shareholders would have to be a revised deal,” Olivia Ker said today in a report. The deal with Chinalco, as the state-owned entity is known, will cut Rio’s earnings per share by 17 percent in 2010, compared with 12 percent estimated in February when it was signed, because London-based Rio’s market value had risen, she said. Metal prices have gained 22 percent on the London Metal Exchange since the accord was agreed and the outlook for Rio’s earnings is more positive, Merrill said. Credit markets have improved “materially” and Rio has refinanced $3.5 billion of debt reducing the need for the sale, Ker said. Rio may offer shareholders pre-emptive rights on the convertible notes it has agreed with Chinalco or offer an equity alternative, she said. It may also increase the conversion price on the notes or reduce the amount offered, she said. Rio fell 3.5 percent to A$64.30 at 11:53 a.m. Sydney time on the Australian stock exchange, after dropping 7.2 percent in London. The performance compares with a 2.3 percent slip in BHP Billiton Ltd. and a 1.2 percent decline in the benchmark index. Rio has agreed to sell $7.2 billion of convertible debt and $12.3 billion worth of stakes in its mines to Chinalco, potentially doubling the Chinese company’s shareholding to 18 percent. Chinalco, already Rio’s largest shareholder, may agree to take a smaller stake in Rio to win support for the deal, the Sydney Morning Herald reported yesterday.