On 5th June 2009, the Rio Tinto group walked away from a deal with Chinalco which worth $19.5 billion. Instead it would be paid ＄195 million of break fee based on the contract. The board of the Rio Tinto Group determined to withdraw from the potential transaction with Chinalco, owing to Australian regulators setting severe conditions to deal with the objections of shareholders and politicians. Instead, in a comment on the Guardian’s Business website ( Guardian, co), it points out Rio expected to make an iron ore joint venture with BHP Billiton to launch ＄15 billion rights issue. This report will present not only historical facts but also advantages and disadvantages of this transaction, which is illustrating that was a typical case of merger and acquisition failure in China. In the final part of the report, some similar reasons are discussed for the disruption of proposed overseas transactions and experiences learned from this case for Chinese enterprises.
2. Background information for the transaction
2.1 Brief introduction of Aluminum Corporation of China Limited Chinalco is a multinational aluminum company headquartered in Beijing 2001. It is the second largest alumina producer and third largest primary aluminum producer in the world. It is mainly engaged in the extraction of aluminum oxide, electrolyzing of virgin aluminum and the processing and production of aluminum which is listed on the New York, Hong Kong and Shanghai stock exchange. Chinalco expanded its overseas investment in Australian 2007, Peru and Vietnam. The company is majorly controlled by the Chinese government.
2.2 Brief introduction of Rio Tinto Group
Rio Tinto Group established in 1873 and headquartered in UK, is a leading mining group in the world. The company is running businesses of copper, aluminum, energy, diamond and gold. It is a combination of Rio Tinto plc (a London and NYSE listed company) and Rio Tinto Limited (an Australian Securities Exchange listed company). According to information published by the Rio Tinto official website: Rio Tinto's business is finding, mining, and processing mineral resources. Major products are aluminum, copper, diamonds, energy, gold, industrial minerals and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa (Chinalco 2009).
2.3 Pioneering strategic relationship
The Boards of Rio Tinto plc and Rio Tinto Limited agreed unanimously that to make a transaction with Aluminum Corporation of China Limited on 12rd February 2009. Reference to Pioneering Strategic Partnership with Chinalco reveals that it aimed to increase shareholder value and improve capital structure. More precisely, they planned to create a pioneering strategic relationship through joint ventures in aluminum, cooper and iron ore. Meanwhile, Chinalco would deliver ＄19.5bn to cover Rio’s debt payment within next two years and transfer convertible bonds to expand existing shareholding in Rio Tinto.
The advantages of Chinalco proposed transaction were obvious and attractive. According to Pioneering Strategic Partnership with Chinalco published by Rio Tinto official website (Chinalco, 2009) also points out, the premium valuation of investment assets and beneficial financing terms would substantially strengthen the balance sheet of Rio Tinto and compel investment opportunities through a cycle. There is no doubt that this transaction would deliver overwhelming benefits. Rio intended to maintain the leading position in the resources industry and keep a long-term relationship with Chinalco to ensure mutual benefits and competitive strength in the following decade.
3. The primary reasons contribute to collapse of the deal 3.1 Chinalco lacked sufficient experience
An article in the Chinadaily website (China clears Australia, miner, 2010) states the failure of the...