DEALTALK-China's Australian M&A feast may slow but far from over

(For more Reuters Dealtalks, click [DEALTALK/])

* China to pause, not halt, Australia M&A drive

* China buys seen likely passing govt review with conditions

* Key factor for future deals is whether bids are hostile

By Sonali Paul and Joseph Chaney

MELBOURNE/HONG KONG, March 9 (Reuters) - China's plans to gobble up more Australian resource companies may be slowed while it waits for Canberra's decisions on three pending deals, but more bids will likely follow if the deals are approved.

Australia's government said last week it will take time to make up its mind about Chinese state-owned Chinalco's $19.5 billion investment in mining giant Rio Tinto (RIO.AX).

Two other deals are also awaiting decisions from the Foreign Investment Review Board: Minmetals' $1.7 billion rescue bid for OZ Minerals Ltd (OZL.AX) and Hunan Valin Iron and Steel Group's $768 million plan to buy a 16.5 percent stake in iron ore miner Fortescue (FMG.AX).

The key factor working in favour of the three deals is that they are not hostile -- the targets are either distressed or looking to shore up cash reserves. That has helped offset concerns that China is picking up prime assets on the cheap.

"It's a cautious but embracing relationship. They don't want to end up selling the farm for bargain basement prices," a Hong Kong-based investment banker with direct knowledge of Chinese bids in Australia told Reuters.

The story might be different for other potential Chinese buys, as cashed-up bidders take aim at companies with healthier balance sheets and prospects.

For example, China's No.3 miner, Yanzhou Coal (600188.SS) (1171.HK), was in talks to buy coal miner Felix Resources FLX.AX for $2 billion, sources told Reuters in December.

CNPC -- the parent of Asia's top oil and gas producer PetroChina (0857.HK)(601857.SS) -- is mulling a solo or joint bid for Australia's third-largest oil and gas firm Santos (STO.AX), media have reported.

SET THE TONE

Chinese firms eyeing healthier Australian companies will take their cues from Canberra's decision about the three deals now under consideration.

"For future transactions, it will certainly set the tone as to whether future deals are encouraged or discouraged," said Matthew Whittall, Australia resources analyst at CLSA.

The government may impose conditions to ensure Chinese state-owned firms don't win control over key resources to the detriment of Australia's interests. But odds are in favour of these and other China deals getting through, albeit with reservations, dealmakers say.

Of the three deals, the Valin investment should be the easiest for the government to approve, three policy sources familiar with the issues said.

The sources declined to be identified due to the sensitive nature of the negotiations.

The Chinalco deal will raise the most questions, as it gives the Chinese company two board seats, marketing rights, and involves a big export earner -- iron ore.

But the government has little legal wiggle room to vote the deals down, policy experts say.

"As an outside observer, it's difficult to see any valid reason for a policy authority, under Australian investment regulation, rules and principals, to reject outright any of these proposals," said Peter Drysdale, a professor at Australian National University.

CONDITIONS

The key concern Chinese companies now have to address is that, as customers owning part of a producer, they will operate at arm's length on metals pricing. And they need to address how they will operate independent of Chinese state control.

On the controversial Chinalco-Rio (RIO.L) deal, Australia's government may look to extend its review long enough so it knows how Rio's shareholders will vote in May, legal sources say.

But that will be tough.

Rio is waiting for regulatory clearances before it puts the deal to a shareholder vote. And as global conditions deteriorate, Chinalco's investment will be tougher for shareholders to reject.

For now, the political wrangling in Canberra creates a mood of uncertainty which will slow the flow of investment into Australia, Drysdale said.

"That's likely to be costly to Australia in terms of potential investment decision delays," he said. ($1=1.562 Australian Dollar) (Editing by Lincoln Feast)