Saturday, February 14, 2009

If Western large institutional shareholders do not like the Chinalco deal, stop complaining just get out

By China Watcher

Rio Tinto US$19.5 billion deal with Chinese state-owned aluminum group Chinalco was reported to have infuriated two large institutional shareholders, London based fund manager, Legal & General Investment Management Ltd (LGIML) and Scottish Widows Investment Partnership (SWIP).

LGIML currently holds 5 percent of Rio Tinto’s total shares whereas SWIP owns 1.3 percent. Both funds expressed disappointment with the deal.

The agreement would ultimately result in Chinalco owning 19 percent of Rio Tinto Plc and 14.9 percent of Rio Tinto if the Chinese company converts all the subordinated convertible bonds.

British media has its hand full by reporting that these institutions are concerns about business deals with Chinese state-owned companies. Perhaps, if the same deal is made with other non Chinese companies, I bet the agreement would be readily acceptable. The largest mine based company needs the funds to partially offset its total debt of US$39 billion.

These Western based fund managers expressed their apprehension over the dilution of shares which, I am not wrong, would arise anyway if the raising of capital is from issuance of new shares or convertible bonds. So, what is really the true agenda of the objections?

On a simple note, these shareholders can keep its current shareholdings intact, if there are willing to inject additional capital to keep the company’s financial healthy with a manageable gearing position. Are they willing?

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