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Not rich coalition. Clinch too anti-Rio. The anagrams were always the best thing about Rio Tinto/Chinalco, the unloved asset swap officially junked yesterday. A distinctly superior construction will take its place.
Rio/BHP Billiton was the tie-up most shareholders always wanted. The logic of combining overlapping iron ore facilities in the Pilbara region of Western Australia was obvious to everyone – including the two sides’ managements, which had often talked but always stumbled on control.
Now that Rio, the larger partner, has run out of options, it is finally giving it up. Analysts value the combined assets at between $100bn and $130bn.
Since Rio’s contribution to last year’s aggregate output was 55 per cent, a $5.8bn investment from BHP seems a fair price to even things up. Along with $15.2bn from the biggest rights issue from a non-financial UK company and a skipped dividend, Rio has the means, at last, to meet its debts.
As for BHP, this is a simple cash transfer, more than covered from internal resources, creating a joint venture that will topple Brazil’s Vale as the world’s largest iron ore producer.
Both sides’ estimate of synergies from the joint venture is $10bn, split equally. But the market has much bigger numbers in mind, as it did during last year’s full takeover bid – BHP’s shares put on 9 per cent in Australia, or about $12bn.
It is premature to describe the package as a win-win. If Chinalco decides not to take up its 9 per cent entitlement, Rio has a nasty overhang.
Competition regulators may also find fault in the JV structure. But provided both groups bury years of animosity, and Rio repairs relations with China – its most important customer nation – that is what it may become.
Meantime, Rio chairman Jan du Plessis deserves credit for an elegant salvage job.
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