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Rio Tinto CEO counts cost of flawed dealmaking

by Paul Whitfield  |  Published January 17, 2013 at 1:59 PM
TomAlbaneseRioTinto.jpgRio Tinto Group CEO Tom Albanese's dealmaking has cost him his job.

The world's No. 2 mining company said Thursday, Jan. 17, it would take charges of about $14 billion on businesses acquired by Albanese, describing the write-downs as "unacceptable" and "disappointing."

Albanese stepped down as CEO of the London-based mining company on Thursday and was immediately replaced by the head of Rio Tinto's iron ore unit, Sam Walsh.

"While I leave the business in good shape in many respects, I fully recognize that accountability for all aspects of the business rests with the CEO," Albanese said in a statement.

His resignation came as Rio Tinto said it would wipe $10 billion to $11 billion off the value of its aluminum operations and a further $3 billion off Rio Tinto Coal Mozambique, underlining the disastrous outcome of Albanese's two largest deals.

Albanese engineered Rio Tinto's massive and ultimately flawed expansion into aluminum with the acquisition of Alcan Inc. for $38.1 billion in 2007, the year he took over as CEO. Rio Tinto acquired the Mozambique operation, Riversdale Mining Ltd., in mid-2011 for A$3.9 billion ($4.1 billion) in a protracted deal led by Rio Tinto's then-energy chief executive, Doug Ritchie. Ritchie also stepped down Thursday.

"The Rio Tinto board fully acknowledges that a write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable," chairman Jan du Plessis said in a statement. "We are also deeply disappointed to have to take a further substantial write-down in our aluminium businesses, albeit in an industry that continues to experience significant adverse changes globally."

Albanese has overseen a turbulent period at Rio Tinto, though much of the drama has been of the New Jersey native's own making.

His first significant act as CEO was the acquisition of Alcan as markets peaked in July 2007. The purchase loaded Rio Tinto with about $44 billion of debt, which it had expected to pay down with cash from earning and assets sales. Those plans fell apart in 2008 when credit markets froze; a slump in commodity prices compounded Rio Tinto's problems and briefly threatened to topple the company. But a $19.5 billion share sale to Aluminum Corp. of China, which was ultimately aborted, and a rebound in Rio Tinto's share price gave the company a reprieve.

Rio Tinto's decision to write a further $10 billion to $11 billion off its aluminum unit follows a similar $8.9 billion write-down last February. Rio Tinto has sold at least $12 billion of Alcan assets since the acquisition, while a further $8 billion had been earmarked for sale as of a year ago, suggesting that the residual value of Alcan assets remaining with Rio Tinto may ultimately be close to zero.

Albanese's second-biggest investment, the acquisition of Riversdale Mining, an Australia-based, Mozambique-focused coal mining company, has now proven to be almost as poor as his Alcan venture.

Problems with transport approvals mean that Rio Tinto has been unable to transport coal from the acquired mines by barge, as expected, and will have to build expensive rail links.

Albanese and Ritchie will both remain with the company until July to assist with the transition. They will both forgo their 2012 bonuses. Albanese has not received a bonus since 2010, after he opted not to take a 2011 bonus as a result of the write-downs at the Alcan operation in early 2012.

Walsh will receive a base salary of $1.9 million and could take in a further 120% of that if he is awarded his full bonus. He will relocate to London from Perth, where he was overseeing iron ore operations that accounted for 78% of Rio Tinto's net profit in 2011.

Walsh is well respected and seen as a steady hand, analysts at Nomura Securities Co. Ltd. noted Thursday. "We do not think you will see any major change in strategy from the group with the new appointment," Nomura analysts wrote. "We certainly think they'll be steering well clear of any acquisitions."

Albanese joins a growing list of CEOs at the world's biggest mining companies who will be without work by the end of the year. Anglo American plc's Cynthia Carroll and Xstrata plc's Mick Davis both agreed to leave their respective mining companies last year, victims of share-price underperformance and a takeover, respectively.

Shares in Rio Tinto traded in London at 3,407 pence ($54.61), down 51 pence, or 1.5% on their Wednesday close. That is 3% higher than 3,310 pence they traded at on May 4, 2007, the first trading day after Albanese took control of the company.

Tags: Alcan Inc. | Aluminum Corp. of China | Anglo American plc | Cynthia Carroll | Doug Ritchie | Jan du Plessis | Mick Davis | Rio Tinto Group | Riversdale Mining | Riversdale Mining Ltd. | Sam Walsh | Tom Albanese | Xstrata plc

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