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Forging A Merger -- Or Not

The President of China's state-owned Chinalco remained remarkably cool under pressure during a Sydney press briefing earlier this month despite the figurative and literal glare of the media spotlight.

Rio Tinto
Rio Tinto

The question on every reporter’s mind: what motivated Chinalco and Alcoa to launch a 'dawn raid' on Rio’s London share register, scooping up a 9 percent stake in the dual-listed company?

That transaction not only took takeover target Rio Tinto and predator BHP Billiton alike by surprise, it also ignited market speculation that Chinalco's acquisition could be a tactical move sanctioned by Beijing to block the possible mega-merger.

It certainly makes sense. After all, Chinese steelmakers stand to lose big time if a combined BHP-Rio Tinto becomes a reality. Like the proverbial colossus, such a group would bestride the resources industry wielding potentially huge pricing power.

Factory, Anshan, China
AP
Factory, Anshan, China

Hardball questions flew at the softly spoken Xiao Yanqing during the press conference quicker than a Glenn McGrath fast-bowl. Was this the long-awaited tactical spoiler by Beijing to throw a spanner in the works of what could be one of the biggest mergers in corporate history? Was Chinalco, acting under the auspices of Beijing, looking to raise its stake to the point where it could block the deal?

Speaking through a translator, the unruffled Xiao didn't deviate from the script. Neither his group nor Alcoa had any plans to buy more Rio Tinto shares. "We don't have any plans to increase our stake in the company," Xiao said. "This is a strategic financial investment" and Chinalco doesn't intend to make a bid for Rio Tinto or seek board representation either, he affirmed.

And in a bid to make it crystal clear to the market that the Chinese were operating above board, the group voluntarily applied to Australia's Foreign Investment Review Board relating to its 9 percent stake in Rio. Despite not being required to do so on the basis of its current stake. Score one for transparency.

Try as he might, Xiao’s attempts to persuade the market that there was no ulterior motive behind the stake purchase in Rio Tinto isn't working. More than two weeks after the Chinalco news broke, markets are still obsessing about the Chinese connection.

The latest to weigh in on this subject is Stratfor, which provides strategic intelligence on global business, economic, security and geopolitical affairs. The U.S. intelligence firm says Chinalco would consider bidding for a majority stake in Rio Tinto if another company attempted a takeover.

Stratfor claims it has spoken with a source 'close to the Australian government' who says Chinalco will block any competing bid. "Beijing appears set on blocking an attempt by the world's largest mining company, Australia's BHP Billiton, to swallow up Rio Tinto, a move that would create a mining goliath worth nearly $350 billion," Stratfor said in a briefing. "Considering that domestic energy security tops the Chinese government's agenda, it is a given that Beijing is looking to carve out a niche in the world's key resource sectors using state-owned energy companies."

It's unclear exactly how much of a stake the Chinalco-Alcoa consortium would be willing to buy and at what price though the highest stake rumored until now has been up to 20 percent. Under Australian takeover law, a stake of more than 19.9 percent would trigger a full takeover offer and Foreign Investment Review Board approval is required for foreign investment of more than 15 percent.

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Charting Asia with Daryl Guppy

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It's also perhaps no coincidence that the Australian government is planning to put closer scrutiny on foreign sovereign wealth funds looking to invest in the country. "If the treasurer forms a view that a foreign investment would be inconsistent with Australia's national interest, it may be blocked or made subject to conditions to address any problems that have been identified," Treasurer Wayne Swan said in a statement.

Despite Chinalco’s ultimate intentions, what many analysts agree on is that the Chinese now have a seat at the table -- possibly with a view to exerting some influence over a combined merged BHP-Rio Tinto.

It could also may mean they can cherry pick assets that may be divested as a result of any merger. To be sure, this takeover story is going to run and run before it reaches any semblance of closure. The posturing between BHP and Rio over the overall bid will continue for months and even when that's been bedded down there’s the maze of regulatory paperwork the parties have to negotiate in multiple jurisdictions. No doubt, Beijing will continue to watch every twist and turn of the saga with more than just passing interest.

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