Failed Rio-Chinalco deal takes away shine from Australia

"Disappointment" is the one word that can best describe the response of Chinese investors and their legal advisors to the rejection of Chinalco's US$19.5bn investment in Rio Tinto, which was announced earlier today.

"Chinalco is very disappointed with the outcome, and so are we," said Peter Cook (pictured), a partner at Mallesons Stephen Jaques, who led the team that acted as Chinalco's Australian legal advisor in this transaction. "Rio Tinto had the option to do what they did and they've done what they've done."

According to industry observers, the transaction was fully documented and already entered into the condition precedence phase prior to the cancellation. All the legal advisors involved in it have already done a significant amount of legal work and have had endless dealings with the main regulator - the Foreign Investment Review Board (FIRB). An ending like this is just hard to swallow, perticularly for Mallesons, Clifford Chance and Haiwen & Partner, who have worked diligently on the deal as Chinalco's legal advisors.

"There would have been a very significant burden on the law firms involved up until now," said Barry Irwin, a partner at Clayton Utz, which has been increasingly busy working on cross-border energy and resources transactions involving Chinese acquirors. "It's not good news for a firm to be associated with any deal that didn't succeed for whatever reasons, but PRC investors will value the firm's experience, as it had the extensive and direct exposure to all of the issues related to a major investment like this one, which was a multi-billion dollar deal that involved iconic assets."

And like any failed deal, the cancellation of the Rio-Chinalco deal will inevitably have a negative impact on Chinese sentiment towards investment in Australia. However, it could have been worse.

"The deal has fallen over due to commercial reasons and market-driven forces. But it is going to take away the shine of the attractiveness of Australia, because it represents another failed Australian deal," continued Irwin.

It's been far from plain sailing for PRC investors this year - in March, the FIRB rejected the original proposal by China Minmetal to take over OZ minerals and only approved its revised proposal recently, which excluded OZ Minmetal's flagship assets in Prominent Hill.

"In some way, it is not a bad result," said Irwin. "We haven't got to the point where the treasurer has potentially said 'no', which then would have been very unfortunate and would have had a very adverse impact on Chinese investment into Australia."

The real impact of this event on Chinese outbound investment into Australia remains to be seen. And one of the obvious knock on effects will be the added pressure on legal teams that are working for PRC companies that have recently entered into acquisition agreements, such as Tengzhong and PetroChina.

"This development will strengthen views among Chinese corporates - particularly in the energy and natural resources sector - that it may take more than their cash to open the doors to deals for them overseas," said Freshfields Bruckhaus Deringer partner Antony Dapiran.


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