Jeremy Warner: Unfinished business at Rio for Skinner

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The Independent Online

Outlook The oil giant BP has spent months wooing Paul Skinner to take over from Peter Sutherland as chairman, and finally it seems to have bagged its man, with news yesterday that Mr Skinner will be quitting as chairman of Rio Tinto in April. With an accomplished history in the oil industry, albeit with BP's big rival Shell, Mr Skinner ought to fit the position hand in glove. Yet first, he must deal with a little unfinished business.

In many respects, Mr Skinner was an excellent chairman of Rio, but he made one fundamental mistake. He paid a top-of-the-market price in cash for Alcan, saddling Rio with way too much debt as it struggles to cope with the most sudden and violent slump in commodity prices the industry has ever witnessed.

On other levels too, this was a bad deal made for the wrong reasons. In a fast consolidating industry, Rio knew that if it didn't act as predator, it would fast become prey. By that stage, Rio may already have known that it was being stalked by BHP Billiton. Alcan provided an apparently effective poison pill.

And so it proved. With the commod-ities boom still in full swing, BHP bid anyway at what today looks like a sensationally good price. Yet less than a year later, with the boom fast turning to bust, it abandoned the endeavour, citing the size of Rio's Alcan-induced debts in a world that had became bereft of the ability to refinance. Rio was by no means the only major mining company to make these mistakes. Much the same thing happened to Xstrata which, like Rio, took on too much acquisition-induced debt at the top of the market and then rejected what, compared with today's share price, was a fabulously generous takeover bid.

In any case, for Mr Skinner, the unfinished business is what to do about all that debt. It would look shabby to jump ship with the balance sheet issues still unresolved. A rights issue would be one way out, but the board is desperate to avoid such a humiliating admission of failure. Instead, it seems determined to go the asset disposal route. Even as little as a year ago, Rio could have secured top dollar for such a sale. Today, Mr Skinner will struggle to find a buyer with the cash to pay even a fraction of the assets' real worth. Yet sell he must. Expect an update on progress with the results in three weeks time.

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