Rio Tinto’s China Deal Needs Revision, Investor Says

By Jesse Riseborough

March 16 (Bloomberg) -- Rio Tinto Group will hand Aluminum Corp. of China “significant influence” over its operations through a $19.5 billion investment and should revise the deal, the mining company’s largest Australian-based shareholder said.

“It’s back into their court to consider the views of their shareholders to see whether they can come up with something that’s more acceptable,” Ross Barker, managing director of Australian Foundation Investment Co., said today in an interview. Aluminum Corp., or Chinalco, “is not just another commercial enterprise, it is owned by a sovereign government, which is a competitor as well as a customer,” he said.

Legal & General Plc, the second-largest institutional shareholder in Rio’s U.K. stock, last month called for an alternative to the injection from Chinalco, which agreed to buy $7.2 billion of convertible bonds and spend $12.3 billion on stakes in Rio projects. Rio should include other investors in its bond sale to quell concern, ING Groep NV said.

“We would’ve found that convertible note very attractive,” said Barker at Australian Foundation, an 80-year-old Melbourne- based investment company with A$3.2 billion ($2.1 billion) in funds. “Pre-emption is part of this issue. The fact that one shareholder gets this deal and the others are left out.”

London-based Rio fell 2.4 percent to A$50.75 on the Australian stock exchange. Australian Foundation sold A$3.5 million of Rio stock in the first two months of this year. The company owns about 0.9 percent of Rio’s Australian-traded stock, according to a Feb. 16 UBS AG report.

‘Deeply Concerned’

Amanda Buckley, a Melbourne-based spokesman for Rio, couldn’t immediately be reached for comment. Rio sought Chinalco’s investment because of $38.9 billion of debt.

Rio is Australian Foundation’s eighth-largest holding with its stake worth A$112 million and it also holds A$414 million of BHP Billiton Ltd. shares at Feb. 28, according to a presentation today. The company was “deeply concerned about Chinalco becoming involved in the running of the business,” it said.

“We are surrendering some of our control to them without a premium being paid,” Barker said. “Chinalco are going to have significant influence in the company at various levels of its operations.”

The Chinalco deal needs the approval of 51 percent of Rio shareholders and the Australian government. Rio may consider changes and Chief Executive Officer Tom Albanese will listen to investors, JPMorgan Cazenove Ltd. said last month, citing a briefing with Albanese.

75 Percent

“If Western companies are in financially bad shape, then they are going to be happy if somebody buys part of the company,” Marc Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “Western companies and governments, they want to do business with China because China is going to be one day and, in many fields, they’re already the biggest customer today. They will think twice about rejecting a China offer.”

Rio shareholders want the company to require 75 percent approval before it proceeds with the investment, the Financial Times reported today, citing the Association of British Insurers. Institutional investors want the proposed deal to be tabled as a special resolution, requiring higher shareholder approval than an ordinary resolution, Peter Montagnon, the ABI’s director of investment affairs told the newspaper.

The 75 percent proposal is “a reasonable position to hold,” Australian Foundation’s Barker said.

Australia extended its examination of Chinalco’s proposal for as long as 90 days, Patrick Colmer, general manager of the foreign investment and trade policy division of treasury, said today in a statement on the government gazette Web site.

To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net;