In an earlier post I talked about what I see as the likelihood of China employing some of its massive (U.S.$2 trillion) U.S. debt holdings to acquire resource and other assets outside of China that it considers strategic. A recent Reuters article says that “Chinese state-owned aluminum group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts, but also raise regulatory scrutiny (from the Australian Government – which is reported as immediately tightening foreign ownership laws by treating convertible debt as if it were equity)”, and that “As part of the biggest overseas investment by a Chinese company, Chinalco will spend $12.3 billion on stakes of up to 50 percent in nine of Rio’s mining assets. It will also buy $7.2 billion of bonds convertible into shares of the world’s largest aluminum maker, second-largest iron ore miner and a top-five copper producer”. The article goes on to say that “Chinalco, the parent of listed Aluminum Corp of China Ltd (Chalco), will potentially double its stake in Australia and London-listed Rio to 18 percent”. One fund manager is reported as saying: “(Rio’s) had to sell away part of the farm and particularly the iron ore assets, which are the jewel”. The transaction apparently requires shareholder, government and regulatory approval.

In a second article it was reported that Alcoa has sold its Rio Tinto stake to Chinalco for $1 billion, and that it will cooperate with Chinalco in new ventures. If I am reading the article correctly Chinalco is paying Alcoa over three times the current market price.

My Comments: I anticipate commenting on many similar stories on this blog in the coming months. In my consulting career I have advised on several ‘related party transactions’ where shareholder disputes have arisen. As a generality, to which admittedly there may be exceptions, it seems to me that the more dismal the economic times the less alternative transactions and flexibility there likely is available to shareholders and regulators. If I am right in this, it seems to me to follow that an aggressive strategic purchaser almost certainly will succeed more often in the current economic environment than it otherwise would – both on more favourable pricing terms and with less shareholder and regulatory resistance – stay tuned and watch China. You might consider reading my February 1 post titled ‘The Chinese Century’ by clicking here.

Read the first article referenced in this post by clicking here, and and the second by clicking here.

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