The Wall Street Journal-20080202-China Jumps Into Rio Tinto Saga- Chinalco- Alcoa Buy Stake- Complicating BHP Takeover Bid

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China Jumps Into Rio Tinto Saga; Chinalco, Alcoa Buy Stake, Complicating BHP Takeover Bid

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Aluminum Corp. of China and Alcoa Inc. teamed to buy a $14.5 billion minority stake in mining giant Rio Tinto, a move that marks China's increasing heft in global natural resources and Alcoa's effort to stay relevant in a consolidating industry.

The investment, which gives the pair a combined stake of about 12% of Rio Tinto's London shares, and 9% of the full company if its Australia-listed shares are included, is enough to complicate a roughly $100 billion proposal to buy Rio Tinto by rival Anglo- Australian miner BHP Billiton. The potential combination, announced in November, prompted concern, especially in commodity-dependent China, that a united BHP-Rio would dominate supplies of iron ore, aluminum and other commodities and drive up prices.

It also adds a wrinkle in the mining consolidation frenzy, which has been dominated by huge companies trying to swoop in to buy other big firms. After BHP announced its bid for Rio Tinto, Brazil's Companhia Vale do Rio Doce disclosed talks to buy Xstrata PLC of Switzerland, a transaction that could be valued at between $80 billion and $90 billion if it happens. By taking a significant stake, Alcoa and Chinalco can position themselves to potentially get some of Rio's existing assets, in this case aluminum.

In teaming with Alcoa, Chinalco also is showing that China and the U.S. -- the world's two biggest consumers of energy and raw materials -- have a common aim in trying to keep the consolidation of the global mining industry from going too far. The two companies already have a history of cooperation, and Alcoa's involvement could help reduce international political discomfort about a Chinese acquisition. Moreover, the move also positions Alcoa, which has been a laggard in the mining industry consolidation boom, to grab some of Rio Tinto's Alcan aluminum operations. Alcoa tried to buy those assets last year, but was outbid by Rio.

The plans for an Alcoa-Chinalco joint venture had been in discussions for months, and picked up steam around Christmas, said one person familiar with the matter. But with little financial muscle and eroding influence overseas, Alcoa's best option for staying relevant was a combination with the Chinese company, this person said. No doubt it is a marriage of convenience: Alcoa rides Chinalco's state-backed financial influence, while Alcoa helps lend political cover for the Chinese effort.

Chinalco and Alcoa said they "do not currently intend to make an offer" for all of Rio Tinto -- but they reserve the right to do so if circumstances change, such as if BHP announces a firm offer with "improved terms" from its initial proposal, which was rebuffed by Rio Tinto. At a minimum, BHP will now require Chinalco's agreement if it wishes to buy 100% of Rio, and faces a Wednesday deadline to come up with a formal offer.

Alcoa is looking at its Rio Tinto stake as a long-term investment. "We together with Chinalco have common goals to grow positions in the overall metals industry," said Alcoa spokesman Kevin Lowery. Under the terms, according to people close to the deal, Alcoa would be able to increase its nominal stake in Rio to "significantly" more under specific scenarios, including "a material change of circumstances." A hostile BHP bid for Rio would be an example of a material change. Getting a bigger stake of Rio would allow Alcoa and Chinalco to be first in line to get some of Rio's aluminum assets, including Alcan.

The venture between Chinalco and Alcoa builds on a six-year relationship. In 2001, Alcoa bought a 7% stake in a Chinalco subsidiary, in an effort to broaden its scope in the Chinese market. Initially, the two companies shared technology and other information. But as Alcoa continued to expand its presence in other locations in China, there were fewer exchanges in technology and the linkup devolved into a mostly financial arrangement.

Alcoa then decided to sell its stake this past September for $1.8 billion, giving it a cash infusion at a time when the company was trying to correct a series of missteps.

The latest move, by far the largest overseas acquisition ever by a Chinese company, is an extraordinary step forward in China's push into global business. Such a deal requires approval from the highest levels of China's government, and a person familiar with the situation said Chinese regulators have signed off. The deal shows that Beijing has regained much of its confidence since the failure of Cnooc Ltd. to acquire U.S. oil company Unocal in 2005.

Chinalco has played down the impact of its move on BHP's proposed takeover of Rio Tinto, saying the investment is intended to help the company diversify away from aluminum and ensure its strong position within a changing industry landscape. Chinalco acquired the Rio Tinto stake through a Singapore-based subsidiary called Shining Prospect Pte. Ltd. Alcoa has committed $1.2 billion to Shining Prospect, the companies said. Chinalco also said funding for the deal was arranged by China Development Bank, a state-controlled institution that lends to support infrastructure and other government priorities and has become an active participant in Chinese companies' overseas expansion. Lehman Brothers Holdings Inc. and China International Capital Corp. advised Chinalco on the deal.

Chinalco and Alcoa paid 60 ($119.32) a share for the Rio Tinto stake. That represents a 21% premium over Rio Tinto's closing share price in London Thursday of 49.56, and is slightly above the shares' recent closing high in December of 57.84. Rio Tinto shares in London Friday rose 13% to close at 56.

A BHP spokesman in London said the company was aware of the Chinalco transaction but had no further comment. Nick Cobban, a spokesman for Rio Tinto, said his company "had no prior notice" of the deal. "We certainly have not been in any discussions. But it does reinforce our position that BHP has undervalued Rio Tinto."

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Rick Carew, Ellen Zhu, Jeffrey Sparshott, Patrick Barta and Dennis K. Berman contributed to this article.