Rio Tinto JV failure leaves Albanese exposed

October 18, 2010

By John Foley and Una Galani

Rio Tinto’s tie-up with rival BHP Billiton has finally crumpled — to the surprise of almost no-one. The deal, which would have combined the two biggest iron producers in Western Australia’s Pilbara region, fell foul of regulators. After more than a year of uncertainty, chief executive Tom Albanese may be relieved. But the saga has not done his credibility any favours.

Albanese first agreed to enter a tie-up with BHP, which had long coveted Rio’s Australian ore, when the company was laden with heavy debts in June 2009. Rio was on the back foot, and the terms of the deal showed that. Rio, which had previously rejected a merger proposal from BHP, even gave its rival the right to nominate the venture’s first chief executive.

While the company publicly stood by the joint venture, shareholders clearly lost faith a while ago. Even so, in the hours after the deal was formally axed, Rio and BHP’s combined market capitalisation fell by around $4 billion. That is far less than the $10 billion of savings the companies expected to make — a figure analysts deemed conservative. Worse, the implied value wiped off BHP’s market capitalisation by investors in Australia following the news was five times greater than the loss suffered by Rio — suggesting that investors felt the terms of the joint venture were far from equal.

A bigger blow is the fact that antitrust watchdogs flatly rejected Rio’s claims that the tie-up would not harm
competition. Albanese argued that the structure meant that the two sides would be unable to collude on the price of iron ore. Regulators in Korea, Europe, Japan and even Australia disagreed.

Shareholders have plenty to give them solace. Rio’s organic growth looks strong, and the company hopes to increase its iron ore capacity by 50 percent by 2015. Question marks remain over projects in Mongolia, and the Simandou iron ore deposit in Guinea, in which Rio has already lost half its rights. Still, if these projects materialise, Rio will have even more momentum.

That should be enough to keep Albanese in his role. But having fluffed three big deals since his tenure began — an
overpriced merger with Canada’s Alcan, an abortive attempt to sell shares to Chinese miner Chinalco, and now the failed joint venture — he might do well to stick to his knitting for a while.

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