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Rio ties up Turquoise Hill loose ends

Rio Tinto (ASX:RIO) has been forced to do a special deal with two dissident shareholders in Turquoise Hill Resources to avoid its $US3.3 billion mop up takeover offer being rejected.

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At Rio’s request, Turquoise Hill postponed the meeting of shareholders scheduled for Tuesday (November 1) just before it was to be held, without any explanation.

Turquoise Hill’s board had unanimously recommended that the company’s minority shareholders vote in favour of the deal, however it has faced growing opposition from some shareholders.

Rio’s mop up bid was priced at $C34 a share but that was rejected and a series of increases in price flowed from Rio until the start of September when agreement was reached on the $C43 a share offer.

Success with the bid will see Rio Tinto take a direct 66% stake in the huge Oyu Tolgoi copper gold project in Mongolia.

Analysts thought the delay was to give Rio time to round up more votes to get its $US3.3 billion, $C43 a share offer for the 49% it doesn’t hold in Turquoise Hill across the line.

They said it seemed Rio was uncertain of the votes, especially with two minority shareholders opposed to it because they thought it was too cheap.

The plan requires approval by a two-thirds majority vote by shareholders, including Rio Tinto, and a simple majority of the votes cast by the company’s minority shareholders. That was obviously under threat, otherwise the meeting would not have been postponed if the pre-meeting votes had given it a big tick.

The noisiest minority shareholder has been the second biggest holder after Rio, Pentwater Capital Management which criticised the offer as undervaluing Turquoise Hill.

Pentwater, the second-largest investor in Turquoise Hill lifted its stake in the miner in mid-September to around 13.77%. It paid $C41.01 a share (or $C102 million) for the extra shares.

Pentwater has said in the past that the proposed premium in Rio’s offer is unacceptable for a mine that it expects to be “the third largest copper and gold mine in the world with a mine life in excess of 90 years.”

Another shareholder, SailingStone Capital Partners has also voiced opposition to the price being offered by Rio Tinto. it is the 5th largest investor with around 2.2% of Turquoise Hill’s issued capital.

In a separate statement yesterday several hours after the meeting’s postponement was revealed, Rio revealed that it done a deal under Canadian law that allows the two shareholders votes to be excluded from the November 8 meeting, meaning Rio will get the bid approved.

The two groups will not get the full $C43 a share – just the $C34 initial price with the rest to be settled in arbitration, which would seem to allow Rio to pay more to the duo than to other shareholders if it was so decided.

In the statement, Rio explained that had had “entered into agreements with certain funds and other entities related to Pentwater Capital Management LP and SailingStone Capital Partners LLC in relation to the special meeting of Turquoise Hill Resources Ltd shareholders to vote on Rio Tinto’s acquisition by way of plan of arrangement of the approximately 49% of the issued and outstanding shares of Turquoise Hill that Rio Tinto does not own.”

“Under the Agreements, the Securityholders have agreed to withhold their votes at the Special Meeting and exercise their dissent rights in respect of the Arrangement.

“Rio Tinto has agreed to increase the dissent condition under the Arrangement Agreement from 12.5% to 17.5% of Turquoise Hill shares issued and outstanding.

“Under the Agreements, the parties have also agreed that the dissent proceedings with the Securityholders and certain other claims shall be conducted by arbitration, and the Securityholders shall be paid C$34.40 of the Consideration following the completion of the Arrangement, with the remaining Consideration payable following the final determination of the arbitration.

By declaring the $C43 per share offer as its ‘best and final’ price in early September, Rio Tinto had painted itself into a corner and made it very hard to boost it.

It repeated this assertion in Tuesday’s statement – clearly for some, but not all minorities after yesterday.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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