Rio Tinto meets Riversdale Mining: When Hedge Funds are your Friends 

September, 2011 - Costas Condoleon, Michael Barr-David

Commentators and the market have lauded Rio Tinto's M&A credentials in relation to its bid for Riversdale Mining. Part of the reason is that the bid was made against a backdrop of the top two shareholders holding more than 40% of the target and not entering into pre-bid agreements with Rio Tinto.  Not only were these top two shareholders perceived to be 'strategic' investors – apparently more interested in coal off-take and hedging the price of coking coal for their steel production businesses than making a profit on their shares in Riversdale – but the top three shareholders held around 55% of Riversdale.

In the end, Rio Tinto successfully acquired 100% of Riversdale.  But with the top two shareholders holding 45.6% of Riversdale (having acquired further shares during the offer period) for most of the bid duration, how did Rio Tinto obtain 96.7% of the remaining 54.4%?

The answer lies in clever strategy and a lot of help from hedge funds.

The bid was initially pitched at $16.00 — a 39.3% premium to the 3 month VWAP of Riversdale shares on ASX prior to Riversdale announcing potential takeover discussions — and subject to a minimum acceptance condition of only 50%.  

In one sense, Riversdale was a classic takeover play for hedge funds – buy as much as possible below the bid price, accept into the offer to satisfy the minimum acceptance condition and collect your profit.  The real unknown was whether the hedge funds could pull it off.  It helped that Riversdale's third largest shareholder (with around 15% initially) was a hedge fund.  On the other hand the top two shareholders aggressively acquired further shares during the offer period and, at one stage, held between them approximately 47.2% of Riversdale shares.  Convincing shareholders that Rio Tinto would be able to acquire 50% when only 52.8% was available (without help from the top two) was quite a trick.

Rio Tinto helped fill the credibility gap with a strategic announcement that it would increase the offer price to $16.50 if acceptances reached 50% by a specified date.  The extra cash galvanised the hedge funds and other institutions and acceptances started pouring in.  Hedge funds that had previously waded into Riversdale shares were more motivated to back the bid — now they would get $16.50 for each extra share plus an additional $0.50 for all shares they had previously accepted into the bid.  Just after the specified date, Rio Tinto had acquired acceptances for just over 41% of Riversdale shares.

Rio Tinto was then faced with a decision: try to get help from one of the top two shareholders, continue on with the minimum acceptance condition or waive the minimum acceptance condition.  Despite some encouraging comments, neither of the top two were forthcoming.  Should Rio Tinto risk the hedge funds and other institutions pulling out of the offer if it remained subject to the minimum acceptance condition, or lock them in, but risk not having control, by waiving the minimum acceptance condition?

Rio Tinto chose to waive the minimum acceptance condition, extend the offer of a price increase with a reduced threshold of 47% and risk not having absolute control.  Why?  It was generally accepted that index funds had 5-6% of Riversdale shares.  Once Rio Tinto waived the minimum acceptance condition, Riversdale would be excluded from relevant indices (because its free float would be very small).  The index funds would either need to sell on-market or accept Rio Tinto's bid.  

The hedge funds were even more motivated to help Rio Tinto reach 47% because the extra $0.50 was only triggered by the final share that tipped Rio Tinto over 47%.  The hedge funds saw 41% in Rio Tinto's hands and 5-6% available, meaning that 47% was eminently achievable.  Rio Tinto, of course, was hoping that momentum would take it past 47% and deliver absolute control.

Rio Tinto achieved the 47% and then its goal of absolute control.  The top two strategic shareholders subsequently accepted into the bid, delivering Rio Tinto outright ownership of all of Riversdale – an excellent result and one of which the deal team is justifiably proud.

Minter Ellison acted for Rio Tinto on its successful bid for Riversdale Mining. 

This article is from our September 2011 edition of Mergers & Acquisitions newsletter.



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