Chinaclo remains coy

Whatever the motivation for the decision by Chinalco and its junior partner to spend $US14 billion on their sharemarket raid on Rio Tinto, their assembling of a blocking stake ensures that if BHP Billiton wants to maintain control of the terms of engagement with Rio it now definitely needs the target board's support.

Until Friday it was technically feasible for BHP to succeed with a hostile bid for Rio, despite the complexities associated with trying to merge the four different legal entities within the two dual listed companies.

After Friday, when the state-sponsored Chinalco and Alcoa acquired 12 per cent of Rio's London-listed entity, a hostile offer can only succeed with the interlopers' support.

Monday's press conference, given by Chinalco president Xiao Yaqin and Alcoa Australia's Alan Cransberg, shed little light on the raiders' motivation or plans.

Xiao did say that Chinalco, a state-owned enterprise, is being funded by China Development Bank, very much a state-controlled institution. He was coy about whether the partners wanted to increase their stake and both he and Cransberg tried to convey the impression that the minority stake was somehow part of a plan to expand their companies' resource bases away from their core alumina and aluminium businesses. He wasn't clear about how that might happen or why Rio, whose biggest asset is its iron ore business, would be attractive to a group whose diversification so far has been into copper.

A possibly quite revealing moment came when Xiao, talking generally about his attitude to mergers and acquisitions, seemed quite enthusiastic about them, with one proviso: "No government would want to see monopolies happen."

China is, understandably, nervous about the implications of two of its three biggest iron ore suppliers merging. Xiao seems quite optimistic about Rio's prospects as a standalone entity, which is a good thing, given the massive price the partners have paid to acquire their shareholding in a takeover-inflated market for Rio shares.

Now that the Chinese have their seat at the table, it is difficult to imagine that they will allow the merging of Rio and BHP's iron ore businesses – and the consequent strengthening of the two giants' bargaining position with Chinese steel mills – that is the core rationale for the proposed merger and the biggest source of the synergies it would generate.

Regardless of how the BHP bid for Rio started, it was always both possible and indeed probable that it would only succeed if it became friendly at some point – and was still always going to involve a protracted offer timetable (given the need for regulatory clearances).

That is because the cleanest and simplest and most certain way for the merger of the two dual-listed structures to be executed is via schemes of arrangement. For the takeover to become a merger using schemes of arrangement BHP needed, and still needs, the whole-hearted support of the Rio board.

Until the Chinese intervened, the BHP strategy appeared designed to soften up Rio and lower the board's expectations before trying to enlist its support for the merger. If it wants to end up with an uncompromised transaction it may have to pursue the target's support a little more aggressively.

Whether Chinalco's intervention hinders or helps BHP's aspirations, of course, depends on the motivation behind the raid.

While Alcoa's $US1.2 billion contribution to the stake could be seen as an indication that the partners are looking for spoils from the merger table – some aluminium assets would be the obvious conclusion – the cynics would regard Alcoa's involvement as a cloak for what would otherwise be the controversial intervention by a sovereign state in a free market transaction. Chinalco wouldn't have acted in such a dramatic fashion if its actions hadn't been sanctioned by Beijing, they say.

If the motivation is opportunism on a large scale, that might help deliver Rio to BHP. If it is an attempt to prevent the merging of the resource giant's Pilbara operations and the strengthening of their market power, the stake is a major obstacle to BHP's prospects of success.

At this point Chinalco doesn't have a veto over the fate of BHP's bid. Schemes of arrangement require 75 per cent of shareholders and shareholdings to vote in favour – which means an opponent would need to assemble 25 per cent of the vote against the schemes to stop a merger proceeding.

Chinalco will apply, according to some reports, to the Australian and UK Governments for approval to acquire up to 20 per cent of Rio. Chinalco has made an application to the Foreign Investment Review Board and, while no-one is saying precisely what it is seeking, one assumes it wants permission to own more than 15 per cent of Rio. The Australian Government would, despite the importance of maintaining close relations with China, have real reservations about allowing a state-sponsored entity, perhaps funded by Chinese sovereign wealth funds, to gain that level of influence over the future of the Pilbara and BHP and Rio's leverage in iron ore negotiations.

The Pilbara is an asset of definite and delicate national interest, particularly during a volatile and dangerous period for the global economy when our resources sector is underwriting the outlook for our own economy. A merger of BHP and Rio, which would create one of the world's biggest companies and see it headquartered and directed from Australia, magnifies the significance to the deal for our national interest.

The concern that Chinalco is a Trojan Horse for China's national interest – in this case, an interest that would be diametrically opposed to our own – will create an awkward test for the Rudd Government.