Randomly Noted

The failure over the weekend by BP to plug its ruptured oil well in the Gulf of Mexico cost investors more than $20 billion today. The company’s American Depositary Shares fell $6.43 to $36.52, resulting in a company worth about $20 billion less than when the Labor Day weekend began last Friday. In part, the stock fell on the well not being contained. But also, investors are beginning to fret over the soaring clean-up costs and likely litigation costs. The company itself now has a market capitalization of around $114 billion – which has some analysts wondering if it weakens further whether it could become takeover bait.

Day 2 of Australian government officials speaking frankly, and sharply, about the shameful sham Shanghai trial of Australian citizen Stern Hu and three Rio Tinto colleagues who are Chinese citizens. Monday, when the sentences came down against the Rio Tinto Four, Australian foreign minister Stephen Smith rightly described them as “harsh.”  Today came Prime Minister Kevin Rudd saying China failed to “demonstrate to the world at large transparency that would be consistent with its emerging global role.” As I’ve said again and again, we know nothing – at most next to nothing – about the case. We don’t know if the four Rio employees are guilty as charged. All we know is they were denied due process at every stage of the case, from their detentions last July to the lengthy prison sentences handed down this week. For its part, Rio Tinto is so eager to remain in China’s good graces – the mining company makes a lot of money there – that it has fired the four defendants while declining to speak out on their behalf. At least Australia’s government is saying what needs to be said.

The trial of the Rio Tinto Four has come to an ugly end with lengthy prison sentences for the Chinese-born employees of the big miner, including Australian citizen Stern Hu. Reporters were allowed to witness the trial’s final day via closed-circuit TV – but no further details about the alleged crimes were forthcoming. We really have no insight into what the four people allegedly did, nor do we know who was on the other side of alleged bribes and exchanges of commercial secrets. As Australia’s foreign minister, Stephen Smith, lamented, “there are serious unanswered questions” about the charges relating to theft of commercial secrets such that “the international business community will want to pursue with China.” Little was heard from Rio Tinto itself – the Australian company has left public statements to Canberra during the eight-month process, and in the past week seemed to distance itself from its employees. This even though the workers’ guilt was by no means established via an open and transparent proceeding. With the exception of Google, Western companies are much too eager to remain in Beijing’s good graces.

My colleagues report that some or all of the four Rio Tinto employees on trial in China for alleged bribery said they accepted payments of one sort or another. Given the  lack of clarity and transparency in the process – which began with their detentions last summer – it’s impossible to know whether the defendants are acting voluntarily or under duress. Also, we don’t know what has happened to the alleged bribers – the employees of Chinese steel mills who offered the alleged bribes to the Rio Four. Are they getting away with alleged crimes? Have they been secretly detained, tried and punished? Why is it we know about the people who allegedly accepted bribes but not those who paid them, and whose enterprises allegedly benefited? You may recall that the saga began last July when China imprisoned the Rio employees – one Australian citizen and four Chinese nationals – on allegations they stole national secrets. Later, Beijing decided it was a routine criminal matter. Even as the closed trial began today in Shanghai, Rio Tinto’s CEO Tom Albanese was shaking hands with Chinese Premier Wen Jiabao in Beijing’s Great Hall of the People.

Rio Tinto employees Stern Hu, an Australian citizen, and three Chinese citizens, remain in jail – yet their case supposedly moved forward Monday. What we actually know is scant, and it’s not from Chinese authorities, who have been happy to remain silent since imprisoning the four last July. What little information reporters have comes from the Australian government, which has tried to keep an eye on Hu’s case, and it’s this: Chinese police handed the Rio Tinto employees’ cases to prosecutors. Colleagues James T. Areddy and Alex Wilson write: “While Chinese officials issued no announcement of Monday’s move, Australia’s government said it was informed that evidence supporting accusations of criminal behavior … had been handed to prosecutors by the Shanghai Public Security Bureau.” And so the murky case “proceeds” either to a quick trial or further delays – we don’t know, because China’s legal system lacks transparency. As my colleagues write, “The case has fueled a political storm in Australia and debates in corporate boardrooms whether it is a normal criminal matter, as Beijing has contended, or a sign of how China may use economic might to challenge multinationals.” Here’s my previous blog on the matter.

DJN colleague Elisabeth Behrmann reports China’s probe of the four Chinese nationals and the Australian – all employees of giant miner Rio Tinto – will conclude Jan. 11. This comes from the Australian government, not China, which means, of course, their ordeal may not end next week. Moreover, it’s not at all clear that Chinese authorities will disclose details of the charges against the four. Our story says “further extensions to the police probe are possible.” Here’s a recent blog on the subject.

As we contemplate China’s continued economic ascent this New Year, let’s not forget what it means to do business in China. In July, four Rio Tinto employees were detained. The three Chinese citizens and one Australian, Stern Hu, remain in prison on vague charges of bribery and theft of commercial secrets. Life goes on for their colleagues; Rio Tinto and other international miners have begun a fresh round of iron ore price negotiations with China Inc. – while the four languish. One trusts Rio and the Australian government are still doing what they can, behind the scenes, to secure for the detainees a modicum of legal and procedural transparency – if not their complete release. The lesson of the Rio Tinto four is simple: If you do business in China and vex someone in power, your employees may be in jeopardy. It’s not unlike Russia, except, as I’ve blogged in the past, China is essential to many Western companies’ growth plans whereas the Economy of Putin can be avoided. As the 2010 iron ore talks heat up in coming weeks, we’ll keep an eye on how China comports itself and how the four Rio Tinto detainees – victims of last year’s aborted round – fare.

What do Disney’s bid for Marvel Entertainment and Baker Hughes’ bid for BJ Services have in common? Disney-Marvel is all about cartoon content; Baker Hughes-BJ is about oil services. Two very different worlds, the one fun, the other gritty – although Marvel will introduce grit to Disney’s Magic Kingdom. More on this below. There are some parallels in the two deals. In each case, a bigger company is filling a glaring gap, and is doing so at a crucial inflection point in the economy: assets in theory remain fairly cheap but possibly not for much longer as consumer confidence improves, manufacturing output increases and the price of oil gets support. First, let’s tackle Baker Hughes’s $5.5 billion acquisition of BJ Services. The cost savings should be fairly easy to pull off, assuming the merger is managed well: Baker Hughes estimates cutting overlapping corporate overhead costs will help achieve $75 million in savings in the first year, with more savings thereafter as other parts of the combined company come together. The goal is to create a more comprehensive one-stop provider of services to oil companies, especially those tackling major projects in far-flung locales where dealing with a single service provider is far easier than juggling several. Baker Hughes-BJ creates a formidable competitor to the likes of Halliburton and Schlumberger, as DJN colleague Angel Gonzalez notes. In the $4 billion Disney-Marvel pact, we have the owner of cuddly cartoon characters adding a world-class stash of edgy cartoon heroes.  So, Disney aims to become a one-stop cartoon shop for the tender 3-year-old and tough pre-teen, male and female alike. (Disney tends to skew female at present.) There are differences in price. Disney is forced to pay a fat premium for Marvel because the latter has so brilliantly preserved its characters’ edge and freshness. At first blush Baker Hughes/BJ seems priced more reasonably – a reflection of the economy’s remaining vulnerability: manufacturing is improving but very slowly, so prices of commodities such as crude oil are still on the soft side. That said, the market thinks Baker Hughes may be overpaying and its shares are down today. Disney shares are down a bit, too, as people worry about its credit rating, among other things. Certainly, Baker Hughes and BJ are two peas in a pod compared with Disney and Marvel – two very different media firms. As my DJ Market Talk colleague Max Murphy points out, Disney’s traditional constituents may be in for a shock once Marvel is absorbed into Walt’s culture: In Marvel’s universe, they write, “people die, sometimes use drugs and occasionally reveal themselves as homosexual, among other scenarios meant to create a gritty true-to-life world for its heroes and villains to inhabit. Will topics like genocide and racism prove taboo for the Mouse House, and will DIS sanitize comicdom to the horror of legions of devoted readers?” I would guess Disney’s bosses are too smart to harm Marvel. Disney will change.

Nearly unnoticed yesterday (Monday) was a signal from China that it intends to continue backing away from the Rio Tinto case in which the state security apparatus detained four Rio employees in China on suspicion of espionage linked to global iron ore talks – and on behalf of another country, as reported by China’s domestic media. As Rio has a base of operations in Australia and one of the four, Stern Hu, holds an Australian passport, Beijing’s finger seemed pointed at Australia, from which China purchases massive amounts of natural resources. Unspoken but not forgotten as the news developed and Australian politicians expressed dismay was the sense that China was retaliating against Rio Tinto for walking away from a  $19.5 billion deal with Aluminum Corp. of China (known as Chinalco) earlier in the year – a major stake sale to Chinalco which might have helped ease China’s concerns about slaking the country’s massive appetite for natural resources.

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The saga of four Rio Tinto employees detained in China continues without a glimmer of transparency from the Chinese government. Yesterday’s statement from the foreign ministry lacked a certain specificity: The four are being held for allegedly stealing state secrets for a foreign government – actions “which hurt China’s economic interests and economic security,” a foreign ministry spokesman said. There were no other details. One might think this disturbing incident would dampen foreign companies’ appetite for doing business in China. But this and previous unpleasant encounters with China’s arbitrary officialdom never do – foreigners keep coming back for more, factoring such scary episodes into the cost of doing business there. Rio Tinto itself certainly won’t exit China, its biggest customer. Will the mining company shift some employees to locations outside China to avoid similar detentions in future? Quite possibly. In fact, some of Rio’s key negotiators – in iron ore price talks with China – reportedly remained outside China in recent weeks, to ensure their phone calls and emails weren’t intercepted. Look for more companies to quietly shift certain vital personnel off-shore. *** Here’s an analysis by WSJ colleague James Areddy: http://online.wsj.com/article/SB124710009614915527.html. Also an interesting blog about state secrets laws by colleague Sky Canaves:  http://blogs.wsj.com/chinajournal/2009/07/09/murky-state-secrets-laws-at-issue-in-rio-tinto-case/