Metals and mining giant Rio Tinto (RTP) will walk away from a multi-billion dollar investment from China's Chinalco. Instead of closing its transaction with the mainland-based company, it will raise money and form a venture with rival BHP Billiton (BHP).
Chinalco would have put $19.5 billion into Rio Tinto in exchange for 18 percent of the company. Rio needs the money to improve its balance sheet. The transaction would have given China access to ore and metals that are critical to the economic expansion of the world's most populous nation.Officials in Australia, where Rio is based, have long been concerned about a Chinese company having so much control over one of the largest firms based in the island country.
Rio plans to raise $15.2 billion in stock sales and combine part of its Australian iron ore assets with BHP in exchange for a part of a joint venture and $5.8 billion.
The road to the Chinalco failed transaction and its denouement are an indication that Western governments remain wary of large investments by Chinese-backed companies. Some of these investments are viewed as "land grabs" of critical and strategic assets that have been depressed in value by the recession. China is cash rich so it can act as the equivalent of a vulture investor to advance its own industrial and financial interests.
The Rio deal shows that, as long as China is viewed as an economic enemy by developed countries, it will have a great deal of trouble getting major transactions past regulators and through the court of public opinion.
Douglas A. McIntyre is an editor at 24/7 Wall St.