Word has been leaking out in drips and drabs all this week about the non-public trial of the four Rio Tinto executives I wrote about last weekend.
There has been no judgment yet, so far as I know, but Stern Hu is reported to have admitted accepting bribes. See Business Week's coverage here.
The prosecution has asked for leniency, so it would appear that Stern Hu's confession is part of a deal. It also seems that Stern Hu's case has outshined that of his co-defendants in the attention the matter is receiving, presiumably because he is the only one who is a citizen of another country (Australia), and thus his trial alone is a diplomatic issue.
What I would ask all to remember about this situation is that what looks like a bribe from one point of view looks a lot like the successful pay-off of extortion from another. Indeed, consider (just by way of hypothesis and clarification) the possibility of bribing a security guard at the border to get one's self and/or friends out of a country run by an oppressive regime.
Back to reality though: my understanding is that all four of the Rio Tinto defendants shall learn their fates on Monday -- and that it is also on Monday that Hu's wife Julie will be allowed to see him for the first time since his arrest in July 2009.
Showing posts with label Rio Tinto. Show all posts
Showing posts with label Rio Tinto. Show all posts
Sunday, March 28, 2010
Sunday, March 21, 2010
China v. Four Rio Tinto Execs
On July 5, 2009, four Rio Tinto employees, one of whom is a citizen of Australia, were arrested in Shanghai for corruption and espionage. The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with two headquarters -- one in the UK, the other in Melbourne, Australia. Rio Tinto was founded in 1873, and is named for the site of its first mine, on the Rio Tinto river, in Huelva, Spain.
The four defendants are to be put on trial this week. Their names: Liu Caikui, Ge Minqiang, Wang Yong, ands the Australian citizen, Stern Ho. They were initially charged with stealing state secrets, which is a capital offense. Perhaps in response to diplomatic protests from Canberra, that charge was dropped, and they stand accused now of taking bribes and related acts of corruption.
Foreign businesses will be looking carefully at the trial as an object lesson in the risks of doing business in the People's Republic.
Question: is this trial really just revenge for the failure of the Chinalco deal? Chinalco is the major Chinese state controlled mining enterprise that offered in early 2009 to make a major infusion of cash into Rio Tinto in return for ownership interest in certain assets. Stockholders in Rio Tinto didn't think they were getting a fair shake, and the deal never went through.
Hell hath no fury like a dragon scorned?
The four defendants are to be put on trial this week. Their names: Liu Caikui, Ge Minqiang, Wang Yong, ands the Australian citizen, Stern Ho. They were initially charged with stealing state secrets, which is a capital offense. Perhaps in response to diplomatic protests from Canberra, that charge was dropped, and they stand accused now of taking bribes and related acts of corruption.
Foreign businesses will be looking carefully at the trial as an object lesson in the risks of doing business in the People's Republic.
Question: is this trial really just revenge for the failure of the Chinalco deal? Chinalco is the major Chinese state controlled mining enterprise that offered in early 2009 to make a major infusion of cash into Rio Tinto in return for ownership interest in certain assets. Stockholders in Rio Tinto didn't think they were getting a fair shake, and the deal never went through.
Hell hath no fury like a dragon scorned?
Tuesday, May 5, 2009
Chinalco boss gives an interview
The Financial Times yesterday ran an interview with Wang Wenfu, president of Chinalco Overseas Holdings, with regard to the Rio Tinto deal.
Chinalco is a state-owned Chinese mining concern, and in February it struck a "strategic partnership" deal with the Melbourne-Australia based mining Rio Tinto Group.
As part of that deal, Chinalco is paying Rio Tinto US$7.2 billion for convertible bonds. If Chinalco were then to convert those bonds into equity, its equity share of the Rio Tinto Group would double, from the present 9% to 18%.
Many shareholders are ticked off, because of the obvious dilution effect such newly-created equity will have upon the value of their own shares.
Their concern has been sharpened by the recent increase in the value of their (and Chinalco's) shares. The shares (which are denominated in pounds and traded on the LSE) become convertible -- or, the first $3.1 billion tranche becomes convertible -- if the price gets to 30 pounds. That seemed somewhat theoretical in February, but the price is now at 28.50 pounds, so the threshold is within striking distance.
So what did Wang Wenfu have to say? Two things:
1) "This investment is a package. It is a result of two months of very intensive negotiations. It cannot be viewed separately."
2) "We respect the rights of shareholders. Shareholders should have the right to help their company and Rio management has to assess the situation and it is their judgment that this transaction is in the best interest of all shareholders."
It does not sound like he plans to do any re-negotiating. In still blunter western-world language, "A deal's a deal, suckahs."
Chinalco is a state-owned Chinese mining concern, and in February it struck a "strategic partnership" deal with the Melbourne-Australia based mining Rio Tinto Group.
As part of that deal, Chinalco is paying Rio Tinto US$7.2 billion for convertible bonds. If Chinalco were then to convert those bonds into equity, its equity share of the Rio Tinto Group would double, from the present 9% to 18%.
Many shareholders are ticked off, because of the obvious dilution effect such newly-created equity will have upon the value of their own shares.
Their concern has been sharpened by the recent increase in the value of their (and Chinalco's) shares. The shares (which are denominated in pounds and traded on the LSE) become convertible -- or, the first $3.1 billion tranche becomes convertible -- if the price gets to 30 pounds. That seemed somewhat theoretical in February, but the price is now at 28.50 pounds, so the threshold is within striking distance.
So what did Wang Wenfu have to say? Two things:
1) "This investment is a package. It is a result of two months of very intensive negotiations. It cannot be viewed separately."
2) "We respect the rights of shareholders. Shareholders should have the right to help their company and Rio management has to assess the situation and it is their judgment that this transaction is in the best interest of all shareholders."
It does not sound like he plans to do any re-negotiating. In still blunter western-world language, "A deal's a deal, suckahs."
Wednesday, November 26, 2008
Best Way to Ensure Competition
A deal long in the making, the acquisition of one global mining company by another, won't happen. It has been sideswiped not so much by the credit markets (just two weeks ago BHP insisted it was going forward notwithstanding) -- it has been sideswiped by the competition policy of the EC.
I refer of course to BHP Billiton, the Anglo-Australian company that had planned to buy the Rio Tinto Group with a share swap at 3.4 to 1.
As I noted back in June, when world credit conditions looked a lot better than they do now, even then the stock of the target company was trading at a level below that suggested by the 3.4 to 1 ratio suggesting that even then the market was concerned that regulators would scuttle the deal.
BHP is the larger of the two concerns, but Rio has the more illustrious history. Rio traces its origins to Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.
At any rate, the deal faced scrutiny from regulators in several of the countries in which both companies did business, including South Africa and Australia. But it was the EU that did the scuttling, by making unexpectedly severe demands in terms of the assets that would have to be sold off by the combined entity.
I'll use my humble blog to express baldly an opinion. Scuttling mergers is NOT the best way to ensure competition. There are several reasons for this. One of them is that the predictable action of authorities along such lines preserves incumbent managements against the threat of takeover -- and that the threat of takeover is a valuable deterrent to laziness or self-dealing by incumbents. I'm not making any such charge against the Rio Tinto management, by the way. I'm only saying that in general when authorities act as those in the EU have done, they remove a worry from corporate managers -- and the public needs to have corporate managers worry. Takeovers are among the things they should be worried about.
The best way of ensuring competition is to look for barriers to entry and then lower them. Why is some well-capitalized industrial company somewhere not even now putting money into a start-up iron ore mine? Because the market demand for iron ore doesn't make it profitable? or because there are administrative barriers? If the latter, then the EU might look into how those barriers can be lowered. That would give existing managements more, rather than less, to worry about
I refer of course to BHP Billiton, the Anglo-Australian company that had planned to buy the Rio Tinto Group with a share swap at 3.4 to 1.
As I noted back in June, when world credit conditions looked a lot better than they do now, even then the stock of the target company was trading at a level below that suggested by the 3.4 to 1 ratio suggesting that even then the market was concerned that regulators would scuttle the deal.
BHP is the larger of the two concerns, but Rio has the more illustrious history. Rio traces its origins to Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.
At any rate, the deal faced scrutiny from regulators in several of the countries in which both companies did business, including South Africa and Australia. But it was the EU that did the scuttling, by making unexpectedly severe demands in terms of the assets that would have to be sold off by the combined entity.
I'll use my humble blog to express baldly an opinion. Scuttling mergers is NOT the best way to ensure competition. There are several reasons for this. One of them is that the predictable action of authorities along such lines preserves incumbent managements against the threat of takeover -- and that the threat of takeover is a valuable deterrent to laziness or self-dealing by incumbents. I'm not making any such charge against the Rio Tinto management, by the way. I'm only saying that in general when authorities act as those in the EU have done, they remove a worry from corporate managers -- and the public needs to have corporate managers worry. Takeovers are among the things they should be worried about.
The best way of ensuring competition is to look for barriers to entry and then lower them. Why is some well-capitalized industrial company somewhere not even now putting money into a start-up iron ore mine? Because the market demand for iron ore doesn't make it profitable? or because there are administrative barriers? If the latter, then the EU might look into how those barriers can be lowered. That would give existing managements more, rather than less, to worry about
Monday, June 23, 2008
BHP/Rio Tinto
In November, the huge Australian mining company BHP Billiton announced a bid to acquire a rival company, the Rio Tinto Group, with a 3-to-1 share swap. In other words, it wanted Rio stockholders to turn in each of their shares for three shares of the new, larger, combined company.
The offer was sweetened a bit in February (3.4 to 1) and in that form is still on the table. Oddly, the prices of the two companies haven't really been trading as if the market finds this offer credible.
If there were a significant amount of arb activity, and a general expectation that the deal would go through, one would expect that the price of a share of Rio stock on the market would be, roughly, 3.4 times the value of a share of BHP stock. So if (just choosing my numbers to make the math easy here) BHP is trading for Aus$40 on a given day, you'd expect to see Rio shares trading for Aus$136.
Why? Because there's a good deal of speculative activity out there that is specifically in the merger arb business. (Sometimes, much less fittingly, called "risk arb," a usage I'll ignore). If the two company's market valuation got out of line, you'd expect the people and institutions in the merger arb business to act on it. Suppose, in may example, BHP is at $40 and Rio is a good deal lower than the valuation implicit in the 3.4 to 1 ratio. Suppose Rio went to $80, which implies a 2:1 ratio. What would happen?
The merger arbs would move in and buy Rio shares like mad. They'd do so in the expectation of being able to trade in each one for their 3.4 shares of BHP -- getting a return of $136 for each investment of $80, an easy $56 if ever there was one. The very fact of their moving in to do this would constitute an increase of demand for the stock of course, increasing its price -- forcing its price up to the level dictated by that 3.4 offer.
To repeat, that's what would happen IF two conditions obtained: there was a general expectation the deal would close, and there was a lot of arb activity.
Apparently one or both of those conditions is missing. Rio is trading at a discount of more than 8% to where it "should" be on such reasoning. Why? I'm guessing the market believes regulators in one or another of the many affected jusridictions will intervene and stop or complicate the deal.
The offer was sweetened a bit in February (3.4 to 1) and in that form is still on the table. Oddly, the prices of the two companies haven't really been trading as if the market finds this offer credible.
If there were a significant amount of arb activity, and a general expectation that the deal would go through, one would expect that the price of a share of Rio stock on the market would be, roughly, 3.4 times the value of a share of BHP stock. So if (just choosing my numbers to make the math easy here) BHP is trading for Aus$40 on a given day, you'd expect to see Rio shares trading for Aus$136.
Why? Because there's a good deal of speculative activity out there that is specifically in the merger arb business. (Sometimes, much less fittingly, called "risk arb," a usage I'll ignore). If the two company's market valuation got out of line, you'd expect the people and institutions in the merger arb business to act on it. Suppose, in may example, BHP is at $40 and Rio is a good deal lower than the valuation implicit in the 3.4 to 1 ratio. Suppose Rio went to $80, which implies a 2:1 ratio. What would happen?
The merger arbs would move in and buy Rio shares like mad. They'd do so in the expectation of being able to trade in each one for their 3.4 shares of BHP -- getting a return of $136 for each investment of $80, an easy $56 if ever there was one. The very fact of their moving in to do this would constitute an increase of demand for the stock of course, increasing its price -- forcing its price up to the level dictated by that 3.4 offer.
To repeat, that's what would happen IF two conditions obtained: there was a general expectation the deal would close, and there was a lot of arb activity.
Apparently one or both of those conditions is missing. Rio is trading at a discount of more than 8% to where it "should" be on such reasoning. Why? I'm guessing the market believes regulators in one or another of the many affected jusridictions will intervene and stop or complicate the deal.
Tuesday, December 4, 2007
BHP/ Rio Tinto
The BHP/Rio Tinto saga is complicated but important. Its important because it involves nothing less than control of a large chunk of the worlds active mines excavating iron ore, copper, coal, and a variety of other minerals.
Its complicated because the word "control" in the above sentence has both a corporate and a national significance, and because the laws of several different nations will play a part in helping determine this.
A little less than a month ago, on November 8, BHP Billiton announced a bid for control of Rio Tinto. In a sense there would be four companies involved in any such acquisition because both Rio and BHP have a dual identity: each is both a British and an Australian corporation -- with separate sets of shareholders but with only one board of directors and managerial structure.
BHP is the larger of the two, but Rio has the more illustrious history. It began with Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.
The dual national nature of the company came about in the 1960s, when BHP bought a majority stake in the Aussie firm Consolidated Zinc.
But, to the point: the board of directors of Rio has resisted BHP's offer, claiming that it significantly undervalues the company.
It is often the case that when the directors of a target company resist such an overture, they realize and accept the fact that they are "in play," they their days as an autonomous operation are nearing an end, but their looking for a "white knight," a friendlier company willing to make a higher bid for the damsel.
The government of China, and corporations it sponsors, may be about to put on the white shining armor in this scenario. China Investment Corp. has US$200 billion at its disposal. Yet so large is the scale of Rio's assets and prospects that there is also talk that by the time the auction is over, that might not be enough.
There's much more that might be said about this matter, but I've just offered you a score card -- or at least sketched the outlines of the score card -- for what may be a long game. We'll see how it fills in.
Its complicated because the word "control" in the above sentence has both a corporate and a national significance, and because the laws of several different nations will play a part in helping determine this.
A little less than a month ago, on November 8, BHP Billiton announced a bid for control of Rio Tinto. In a sense there would be four companies involved in any such acquisition because both Rio and BHP have a dual identity: each is both a British and an Australian corporation -- with separate sets of shareholders but with only one board of directors and managerial structure.
BHP is the larger of the two, but Rio has the more illustrious history. It began with Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.
The dual national nature of the company came about in the 1960s, when BHP bought a majority stake in the Aussie firm Consolidated Zinc.
But, to the point: the board of directors of Rio has resisted BHP's offer, claiming that it significantly undervalues the company.
It is often the case that when the directors of a target company resist such an overture, they realize and accept the fact that they are "in play," they their days as an autonomous operation are nearing an end, but their looking for a "white knight," a friendlier company willing to make a higher bid for the damsel.
The government of China, and corporations it sponsors, may be about to put on the white shining armor in this scenario. China Investment Corp. has US$200 billion at its disposal. Yet so large is the scale of Rio's assets and prospects that there is also talk that by the time the auction is over, that might not be enough.
There's much more that might be said about this matter, but I've just offered you a score card -- or at least sketched the outlines of the score card -- for what may be a long game. We'll see how it fills in.
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