Jeremy Warner: Rio Tinto – another lesson in the perils of empire-building

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The Independent Online

Outlook: The Chinese are fuming and some shareholders are still demanding Tom Albanese's head on a platter. But in the round, Jan du Plessis, Rio Tinto's chairman, seems to have negotiated a satisfactory finale to the tale of corporate woe that began with Rio's top-of-the-market acquisition of Alcan two years ago.

When the chairman of a football club expresses complete confidence in his beleaguered manager, you know the manager's number is up. Yet I think we can be confident that Mr du Plessis is sincere in his support for Mr Albanese, who many shareholders blame for the debacle of Alcan and the now defunct tie-up with Chinalco.

People assume that the chief executive calls all the shots, Mr du Plessis points out, but in fact strategic decisions of this sort are the collective responsibility of the board. The Rio board had Alcan in its sights from well before Mr Albanese became chief executive, and in any case, as commodity prices rode the Chinese boom, the Alcan acquisition initially looked a steal.

As for Chinalco, the world was in meltdown at the time the Chinese deal was negotiated. The Chinese offered certainty for Rio's balance sheet at a time when it would have been impossible to have raised the necessary cash via a conventional rights issue.

With metal prices now rebounding sharply, it's a changed world we live in today. Even Chinalco must have understood that the original terms could no longer be acceptable to shareholders. In Mr du Plessis's book, Mr Albanese has adapted as fast as could be expected to a changing landscape. Now he's looking forward to being a proper chief executive again, rather than a corporate financier, the task he's performed for the last two years.

Some might say it would have been better had he adopted that attitude all along. Chief executives should manage. When they fall prey to the siren calls of fee-hungry investment bankers and embark on empire-building, that's when things go wrong.

The tie-up with Chinalco was always bound to be problematic. In Australia, where Rio's choicest assets are located, the transaction went down like a lead balloon. Among Australians, only the Prime Minister, Kevin Rudd – a Mandarin speaker keen to foster closer relations with the Chinese – seemed minded to back the deal. The rest of the political establishment was deeply suspicious of this marriage of customer and supplier.

Down under, few seem to have similar objections to the alternative iron ore tie-up with BHP Billiton, even though it involves planned cost cuts and synergies worth $10bn or more and is plainly monopolistic. Screwing the customer doesn't seem so bad if he's largely your powerful Asian neighbour.

This is not yet a done deal. The European Commission could still stick a spanner in the works, rather in the way it did when BHP tried to bid for the whole shebang a year ago. Some regulators will see the proposal to keep marketing and sales separate even though production will be merged as a largely cosmetic construct to mitigate a fundamentally uncompetitive arrangement. In any case, Rio expects the joint venture to take the best part of a year to clear.

Still, the stock market seems to like the new proposals. The $5.8bn Rio will eventually receive in cash from BHP to equalise the assets places a value on the whole venture of $116bn, which is higher than the read-across from the Chinalco deal. In the meantime, the blockbuster $15.5bn rights issue will solve Rio's immediate financing difficulties.

A happy ending, then? Not entirely. It would plainly have been much better had this terrible mess not been created in the first place. Mr Albanese would argue that hindsight is a wonderful thing, but in fact very few mega-mergers of the sort that the Alcan acquisition amounted to deliver the value they are supposed to, and anyone with any experience of the mining industry would have known that there is such a thing as the commodities cycle. By paying a top-of-the-market price for Alcan in cash, Rio recklessly exposed itself to the possibility that the super-cycle some believed had been created by the Chinese boom would turn out to be illusion. So it proved.

The consequences of this blunder could have been much worse. Investors escaped the Chinese takeaway by the skin of their teeth and thanks to a possibly temporary bounce in commodity prices. If Mr Albanese had had his way, the crown jewels would already be locked away in Beijing.