On the face of it, the raid by Alcoa and its former Chinese associate, Aluminium Corporation of China (Chinalco) on Rio Tinto is a major move: the reality is that it could end up a waste of time and money.
Certainly there is no chance Alcoa and Chinalco would be allowed to buy Rio Tinto for competition reasons in alumina and aluminium; while the outright cost of well over $US160 billion would cripple both companies, as well as cause major problems between the Australian and Chinese Governments.
(Alcoa, which was eyed off last year by both Rio and BHP was rejected as being too expensive for the quality of assets involved).
China's biggest aluminium producer, Chinalco and Alcoa have jointly spent $US14 billion to buy a key 12% in Rio, but that's in the London-listed shares. Taking into account the shares listed in Australia, the stake is more like 9% which is close to a blocking stake, but not quite enough.
BHP's share price jumped 12% in London, suggesting that investors think that the deal has been scuppered.
They were worried that BHP might end up overpaying for Rio by boosting its ignored three BHP shares for every one Rio share.
But there are a couple illusions here that shareholders in both companies will have to see through.
The Chinalco/Alcoa holding could make life difficult for BHP, but seeing the stake is in London and not Australia and is less than 10%, it's just a large portfolio investment.
And not even in cash rich China, would Chinalco be able to fund the $US160 billion needed to buy Rio.
Stories in the London media that Chinalco could be 'funded' by the Chinese Government are just stories, like so many others in takeovers. The sum mentioned, $US160 is 10% of China's foreign exchange reserves and an awful lot of money to spend trying to block a deal that will not fly in its present form.
To do so would involve funds from Government sources, such as the country's Sovereign Wealth Funds. That changes the stake and makes it doubtful that a state-controlled and financed takeover would get past the Australian government, making a full bid for the dual-listed Rio unlikely.
Chinalco's adviser, Lehman Brothers told Rio and the Australian government about the stake Friday night, making a voluntary request for approval to the Foreign Investment Review Board in an attempt to keep the government on-side.
That's because Chinalco is Government-controlled and bids from those sources need pre-approval from FIRB.
And while Australia has approved other investments by Chinalco (such as the bauxite deposits at Arukun in Queensland), the stake could prove politically controversial, because Rio and BHP Billiton are prominent companies and something of national champions.
The role of the Queensland Government should not be underestimated. It may have awarded the Arukun deposits to Chinalco, but the far richer Weipa deposits north of Arukun on western Cape York, and the huge Comalco (Rio) alumina refineries and smelter at Gladstone would be in the sights of Chinalco and Alcoa.
Competition authorities here, in the US, Canada, Europe and the French and Swiss Governments would all have to give their approval (it stretched out the Rio takeover of Alcan). It's doubtful any government or competition authority would allow a full bid to happen involving a state-owned Chinese company.
Alcoa is there because it and its former Chinese associate hope to get something in return from a successful BHP bid for Rio. Again, ambitions of getting its hands on alumina or aluminium producing assets would look slim, especially in Europe where much of the old Pechiney assets controlled by Alcan are located.
London sources quoted in the media said the investment – which is 9% of the combined dual Australian-UK listed entity – is not big enough to completely block a potential bid by BHP, but is large enough to give China a seat at the table at any merger talks between the two companies.
The consortium acquired its stake through an investment vehicle named Shining Prospect.
News of the deal boosted Rio Tinto's shares, which closed up 644p to £56. BHP's price, meanwhile, closed up 145p at £16.22.
The raid emerged days before BHP is expected to table its formal all paper offer for Rio.
The BHP board met for two days in Melbourne late last week without an announcement.
BHP has to launch a bid for Rio by this Wednesday night, Australian time, under a ruling by the London Takeover Panel. It is due to report its 2007-08 interim profit on Wednesday in Australia.
BHP could abandon the idea of a bid and sit and wait and watch the Rio share price fall and put pressure on Chinalco and Alcoa's finances by waiting out for six months or so in the expectation the Rio share price will fall back to something reasonable for a new offer later this year.
Some commentators in London say that there's some official Chinese encouragement of the raid to put pressure on BHP not to bid for Rio.
China is worried about BHP and Rio combining their iron ore operations, and building up scale in copper, all coal types and alumina and aluminium, not to mention nickel.
Asked whether the timing of the raid had been designed to disrupt BHP's deal, Chinalco president Xiao Yaqing claimed it had not. He was reported in London as saying "It is a coincidence. The investment was made primarily to diversify into other ferrous and non-ferrous metals".
He arrived in Australia yesterday to see the Federal Government and will hold a news conference tomorrow.
He claimed Chinalco had invested in Rio because it liked the management and was "very bullish" on the long-term prospects for the mining sector.
Chinalco and Alcoa said they did not currently intend to make an offer for the whole of Rio but reserve
