Rio Tinto passes on $19.5 billion

Posted Jun 5th 2009 8:00AM by Tom Taulli
Filed under: BHP Billiton Ltd ADR (BHP), Rio Tinto plc ADS (RIO)

It was certainly a big-time bet: Chinalco agreed to invest a whopping $19.5 billion in Rio Tinto (NYSE: RTP), which is the #3 ore miner. However, over the past couple months, there was some doubt as to whether this transaction would come to fruition.

Well, this week, we got an answer. That is, Rio decided to dump Chinalco and instead form a joint venture (JV) with BHP Billiton (NYSE: BHP), which is the #2 player in the global ore industry (keep in mind that both firms had a buyout deal that blew up last year).

Now, the JV has lots of merit. For example, there will be huge cost synergies, which could amount to more than $10 billion.

Yet, to keep things operating, Rio Tinto still needs enormous amounts of cash. The debt load is $38.9 billion (which was boosted significantly because of the massive acquisition of Alcan).

As a result, Rio Tinto plans to raise $15.2 billion in an equity offering, which will deeply dilute shareholders. Oh, and BHP will pump $5.8 billion into the JV.

But, as is the case with mega deals, there was a big dose of politics. No doubt, Rio Tinto is a major strategic asset for Australia. So, selling a massive stake to a Chinese operation was not particularly favorable. And, it definitely helped that the global credit markets started to open up over the past few months, making it easier to access capital and devise creative alternatives.

Tom Taulli is the author of various books, including The Complete M&A Handbook and the founder of BizEquity, a free online business valuation tool for small businesses.

Tags: BHP, inthenews, joint venture, JointVenture, MA, RTP