RE: RE: question
Quoting from a CS-report 2 days ago, RIO's share purchase activity the last 12 months:
Considering provisions of relevant Canadian securities regulations (Section 100 of the Ontario Securities Act and the British Columbia Securities Commission’s Multilateral Instrument 62-104) which provide a potential path for Rio to sidestep the ‘5% in 12 months’ rule and move to majority control through a Private Agreement purchase rather than creeping.
Creep – but only above 50% after 21-June-2012
Rio has already increased its shareholding in Ivanhoe by 4.5% in the past 12 months. Therefore within the ‘5% in 12 months’ rule Rio’s moves would be restricted to:
- After 18-January-2012, when the 49% standstill agreement expires, Rio could purchase another 0.5%, increasing its total shareholding to 49.5% but keeping cumulative purchases in the last 12 months to 5%;
- After 21-June-21012 Rio could purchase another 2%, taking its total shareholding to 51.5% thereby moving Rio into a majority shareholding and a majority control position in the company (in June-2011 Rio purchased 2%).
(Background:
21Jun2011: Exercises remaining warrants increasing ownership from 42% to 46.5% by acquiring 55,122,253 shares at US$9.10 per share for total consideration of US$502m. Rio's increased ownership permits it to nominate an additional director to Ivanhoe's board increasing Rio nominated directors seven out of a total of 14. Incremental ownership 2%, total 46.5%
24Aug2011: Rio exercises right to subscribe and acquire shares under its Subscription Right. Acquires 27,896,570 shares increasing Rio's interest by 2.0% to 358,158,442 shares or 48.5%. Price paid C$18.98 for total consideration of C$529.5m. Incremental ownership 2%, total 48.5%
26Sep2011: Rio acquires 3,700,000 shares increasing ownership by 0.5% to 361,858,442 shares or 49%. Aggregate cost C$73,075,000 at a price per share of C$19.75. Incremental ownership 0.5%, total 49%
Summary: Aquired last 12 months 4.5%)
An alternative to creep: Private Agreement Purchase
Another possible alternative to creeping to majority control (after 21-June) would be to acquire shares under the Private agreement exemption. Section 100.1 (1) of the Ontario Securities Act is an exception to the ‘5% in 12 months’ rule.
This allows for a purchase of shares from no more than 5 shareholders under an exclusive offer at no more than 115% of the market price. However it remains a challenge for us to see which shareholders in Ivanhoe would be willing to sell to Rio given whoever sells would be handing control of the company to Rio at no more than a 15% premium – paid to a select few shareholders. It would certainly “spoil the party” for other Ivanhoe shareholders who are wanting to see a valuation uplift from a potential full takeover offer from Rio.
Rio’s options
We continue to see an asset only deal as the most optimal in the long term. This would avoid the process of non core asset sales that we believe would occur if Rio were to takeover the whole of Ivanhoe.
We summarise Rio’s major options as:
- Move above 50% in 2012 and not increase further - Rio could further see Oyu
Tolgoi de-risked however it would also be in control of a series of other assets that do
not fit its portfolio and would have to share the benefits of a fully operational Oyu
Tolgoi.
- Friendly asset deal to purchase Oyu Tolgoi from Ivanhoe Mines– Most optimal
outcome but only possible if Ivanhoe’s directors and Rio agree on valuation. Rio would
give up its 49% interest in Ivanhoe, pay a cash component and take ownership of the
Oyu Tolgoi project.
- Hostile takeover of Ivanhoe Mines – Rio could make a direct offer to shareholders
for cash plus “script in an Ivanhoe holding company” that would own the non Oyu
Tolgoi assets. A full takeover with premium consolidating all of Ivanhoe’s assets within
the Rio portfolio is unlikely in our view.
In each case Ivanhoe’s second largest holder with c14% would have to be satisfied.