Tags: Blackstone, China, Chinese Investments

Blackstone, China Govt. Planning a Bid for Rio Tinto, Say Media Reports From Today

By , Money Morning •

By Jason Simpkins
And William Patalon III
Money Morning Editors

In the latest move underscoring China's push to create captive supplies of key natural resources, Blackstone Group LP (BX) is planning a bid for Rio Tinto PLC (RTP) that may include China's sovereign wealth fund, according to several media reports emanating from Asia early today (Monday).

China Investment Corp., which in May paid $3 billion for a 9.4% take in Blackstone, has already denied this month that it might bid for the London-based Rio, which itself is already working to wriggle away from a $137 billion hostile offer from BHP Billiton Ltd. (BHP). Blackstone operates the world's biggest leveraged buyout (LBO) fund.

But Blackstone has appointed lawyers and is in talks with banks and public-relations companies to position itself for the huge buyout offer, according to the London-based Daily Telegraph newspaper and Bloomberg News.

A BHP takeover of London-based Rio would concentrate supply of copper, iron ore and coal and may spur Chinese companies to step up global takeovers to secure raw materials. Although investors evaluating the reports sent Rio Tinto's shares higher by nearly 2% in trading in Australia early this morning, not everyone believes the media reports are true.

"I don't think China Investment Corp.'s current position in Blackstone is big enough to use Blackstone as an investment tool,'' Lu Yizhen, who helps manage $640 million at the Shanghai-based Citic Prudential Fund Management Co., told Bloomberg.

But the pending potential buyout illustrates two key global trends that U.S. investors should watch closely – and capitalize on for substantial possible profits – as the trends play out. The rumored deal underscores:

  • The inspired push China-based firms are making to lock up suppliers of key commodities – a push that has the blessing of their government.
  • And the growing importance of so-called "sovereign-wealth funds," the gigantic state-run investment pools that are projected to become dominant forces in global finance in the decades to come. Indeed, according to one estimate, the amount of capital held by worldwide sovereign wealth funds could grow from $3 trillion today to $12 trillion 2015. And that may be conservative, as some forecasts state that the funds could hold $20 trillion by the middle of the next decade.

Other buyouts announced late last week stand as additional evidence that these forces are already at work.

The List of Deals Grows Longer

In a buyout proposal announced late last week, China's second biggest iron ore trader, Sinosteel Corp., has offered to pay $1.1 billion for Midwest Corp. Ltd. (PINK: MISKF), an Australian mining company.

Nor was Sinosteel wasn't the only China-based company shopping last week, The Wall Street Journal reported. Northern Peru Copper Corp., a mining company based in Vancouver, revealed it received a $449 buyout bid from a duo of other state-run ventures from China: China Minmetals Nonferrous Metals Co. and Jiangxi Copper Co., (PINK: JIAXF). In a company statement released late Thursday, Northern Peru Copper said it supported the bid. A Minmetals spokesman declined to comment. Jiangxi Copper officials couldn't be reached.

Even though Rio Tinto Chief Executive Officer Tom Albanese, recently described a prospective $137 billion merger with BHP as being "dead in the water," the very specter of such a mega-merger has served as a wakeup call to many in the Chinese metals industry.

"The potential BHP-Rio merger has prompted Chinese companies to speed up overseas acquisitions to grab more resources," Ma Hatian, an analyst with Beijing Antaike Information Development Co., told Bloomberg News. "China is repeating what Japan had done in the 1980s [and] that is to boost overseas investment to secure raw materials for development of its heavy industries."

Too Big To Ignore

Indeed, if BHP and Rio did merge, the combined company would have market value of about $380 billion and annual sales of about $54.6 billion, based on 2006 figures. By contrast, archrival Anglo American PLC (AAUK) had revenue of only $33.1 billion last year. Even more critical: The combined BHP-Rio would control 38% of the seaborne iron ore trade, according to Australia & New Zealand Banking. China's leaders fear that such an industry colossus would give suppliers greater leverage and lead to vastly higher prices for a country that is the world's biggest user of iron ore and other key minerals.

Rio has spurned BHP's advances, saying the latter company's offer was way too low. And many experts believe it would take an offer of at least $200 billion for an industry player such as Baoshan Iron & Steel Co. Ltd., otherwise known as Baosteel, to get a deal done.

The government-owned Sinosteel has an initial joint venture with Midwest to develop two iron ore projects in Western Australia. But a merger would give the company a reliable supply of raw material for its operations.

"They want to get their hands on iron ore direct," Gavin Wendt, a senior resource analyst at Fat Prophets Management, told Bloomberg. "It isn't surprising given the extraordinary level of Chinese interest in Australian iron ore."

The price of iron ore has risen for five straight years on increased demand from China, the world's largest steelmaker. Many analysts believe prices will rise 50% next year.

Last week, Baosteel, China's largest steelmaker, said it was seriously considering a bid for Rio Tinto. However it doesn't look as though Rio is for sale. In addition to saying a deal with BHP was effectively stalled, Albanese, Rio's CEO, said his firm had been approached with offers from other suitors, but isn't interested.

"Lots of people have been calling, but we have not been engaging," Albanese said in an interview with CNBC.

With Blackstone and China Investment now reportedly involved, the question now becomes: To engage, or not to engage? Only time will tell.

News and Related Story Links: