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Rio Tinto was forced into a half-price sale of shares today after the collapse of its highly controversial $19.5 billion (£12.2 billion) deal with the Chinese.
Under immense pressure from its own shareholders, Rio today reneged on a tie-up agreement with Chinese aluminium group Chinalco and instead launched a deeply discounted rights issue to shore up its creaking balance sheet.
The U-turn is a grave embarrassment to Rio chief executive Tom Albanese who broked the aborted deal and who has been the victim of increasingly pointed criticism by shareholders.
Rio said today that it is going to its shareholders to raise $15.2 billion in a rights issue where existing shareholders can buy 21 new shares for every 40 they own. The new shares are priced at only 1400p a share — a 48% discount to Rio's share price at last night's London close.
The half-price sale of new stock sent Rio shares soaring to a seven-month high, 13.5% or 370p dearer at 3090p.
Rio is launching the rights issue after scrapping a deal in which state-owned Chinalco was to have taken a stake in nine Rio mining interests and which granted the Chinese convertible bonds that might have given them a near-20% stake in Rio.
When Albanese had negotiated the deal, Rio was in desperate need of the cash to bolster a balance sheet straining from the group's expansion and the bursting of the global commodities bubble.
Rio shareholders, however, went ballistic claiming their holdings were being diluted, that they had not been offered the same deal that was on the table for the Chinese and that those Chinalco terms looked increasingly generous.
Today Rio's new chairman Jan du Plessis who only recently replaced his £930,000-a-year part-time predecessor Paul Skinner, said: “Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement.
“This has had two consequences. First, the financial terms of the Chinalco transaction became markedly less valuable and, second, our ability to raise a level of equity appropriate for our needs on attractive terms has improved very considerably.”
In tandem with the rights issue, Rio Tinto is raising a further $5.8 billion by pooling key Western Australian iron ore assets with its great arch-rival BHP Billiton. The deal comes within a year of BHP Billiton's attempted hostile takeover for Rio.
Du Plessis said the rights issue — which is likely to mean a £300 million fees bonanza for City advisers headed by Credit Suisse and JP Morgan Cazenove — and the BHP joint venture deal will reduce Rio debts from $38 billion to $23 billion.
A break fee on the Chinalco deal means Rio will have to pay the Chinese $195 million in compensation.
Mining analyst Jason Fairclough at Merrill Lynch questioned the size of the rights issue saying it was excessive especially as the company is expected to raise $2.5 billion in asset sales this year and save $800 million from its decision to scrap its next dividend payment.
Fairclough believes the financial restructuring will dilute earnings by 17% more than the Chinalco deal.
BHP Billiton is understood not to have ruled out a renewed bid for Rio despite being banned under Takeover Panel rules from mounting such a bid until later in the year.
