Miner Rio Tinto’s Lengthy-Awaited Deal Comeback Is Caught in Limbo

(Bloomberg) — Mining large Rio Tinto Group is discovering that its long-awaited return to chopping a serious deal with out the brash spending of its previous is proving a problem.

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Its greater than $3 billion bid to purchase the remainder Turquoise Hill Assets Ltd. and enhance its publicity to an enormous copper deposit in Mongolia has successfully been placed on maintain. Rio struggled to win investor assist, forcing it to supply uncommon phrases to essentially the most cussed holdouts which gave the impression to be sufficient to shut the deal.

However inside days, Canadian regulators took difficulty with the facet deal, compelling Turquoise Hill to postpone the shareholder vote.

M&A is a delicate topic at Rio. Disastrous offers greater than a decade in the past nearly sunk the corporate, price a former CEO his job and led to regulatory probes. But there’s a recognition inside the world’s No. 2 mining agency that these points have forged a shadow for too lengthy.

Rio’s September provide to purchase out the 49% stake in Turquoise Hill it doesn’t already personal — at improved phrases from a bid earlier within the yr — makes a whole lot of sense for a return to main dealmaking.

It could enable the corporate to consolidate management over the Oyu Tolgoi copper mine, which might develop into one of many world’s largest. The metallic is amongst Rio’s favored commodities and a vital a part of the worldwide inexperienced push — and as soon as the underground element of the mine is accomplished, it will assist the producer to shut the hole on its largest copper rivals.

Plus, a deal earlier this yr with the Mongolian authorities eliminated a lot of the political threat round Oyu Tolgoi. Crucially, a deal would additionally present that CEO Jakob Stausholm can safe development with out destroying shareholder worth.

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“Rio just isn’t as diversified as its friends and the flexibility to develop away from iron ore simply isn’t there with out offers,” Liberum analyst Ben Davis mentioned. “If you happen to’re struggling to do offers like this it doesn’t bode nicely.”

Shareholder Deal

Regardless of successful board approval for the September provide, Pentwater Capital Administration LP and SailingStone Capital Companions LLC — which mixed maintain about 16% of Turquoise Hill’s excellent inventory — opposed the deal on the grounds that it undervalues Turquoise Hill. An influential advisory agency additionally echoed that view.

Rio countered that by warning that if Turquoise Hill shareholders didn’t settle for the provide, they confronted having to stump up billions within the subsequent two years to fund Oyu Tolgoi’s improvement.

With Rio dealing with defeat, it acquired the vote pulled on the final minute. It then struck a facet take care of SailingStone and Pentwater the place the 2 buyers agreed to withhold their votes in trade for C$34.40 per share — nicely under the C$43 provide value — with an arbitration course of to determine a ultimate value.

The transfer meant the holdout buyers wouldn’t should again down whereas permitting the deal to go forward, all with out Rio elevating its bid and in addition avoiding a massively diluted rights difficulty.

It did nevertheless anger some minority shareholders who felt SailingStone and Pentwater would get a sweeter deal. Bahamas-based Caravel Capital lodged a criticism with Quebec’s securities regulator and Caravel fund supervisor Jeff Banfield mentioned different, bigger shareholders made comparable complaints.

Confronted with investor strain, Quebec’s securities regulator requested Turquoise Hill to delay the acquisition vote indefinitely because it research whether or not the settlement is authorized, injecting contemporary uncertainty into the deal.

Greatest Supply

Rio has repeatedly mentioned it has made its finest and ultimate provide for Turquoise Hill. Rio insiders say the view inside the corporate is obvious that its credibility would endure if have been to lift its bid.

Disastrous previous offers spotlight the significance of that credibility.

On the peak of the commodity supercycle in 2007, Rio entered a bidding conflict with Vale SA and Alcoa Inc. for Canadian aluminum maker Alcan Inc. It blew them each out of the water with a $38 billion money provide that despatched its debt spiraling. Described because the worst deal in mining historical past, it soured as aluminum demand slid in the course of the world monetary disaster and Chinese language provide flooded the market.

It pressured Rio to take nearly $30 billion in writedowns and finally price the CEO on the time his job.

Then in 2011, Rio purchased Mozambique coal producer Riversdale Mining Ltd. for $3.7 billion in a rushed deal. Nevertheless it didn’t develop the challenge as deliberate and the unit was offered for $50 million following enormous impairments.

Rio has spent a lot of the previous decade appeasing shareholders with document dividends because it targeted on making money from its sprawling iron ore mines. But new Chairman Dominic Barton has mentioned the M&A reluctance has come at a price.

Many good strategies from inside the firm have been missed over fears of investor backlash, he mentioned final month, including that the board could be concerned in dealmaking going ahead.

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