Rio left at the altar, and the world’s a safer place: Kohler

The directors of Rio Tinto are now shags on a rock, jilted by an ardent but capricious suitor and now contemplating a lonely-hearts advertisement.

The directors of Rio Tinto are now shags on a rock, jilted by an ardent but capricious suitor and now contemplating a lonely-hearts advertisement.

“Single mining company, 103-years-young, seeks genuine life partner for romantic strategic off-sites, walks on the beach and candle-lit board meetings (to reduce carbon footprint). Ideal partner is someone who will love me for who I am, although if you want to change me – well, that’s okay too. But you will have to accept my neurotic family of bankers, including the weekly Sunday roast.

“I have an unfortunate condition known as DLC bipolar syndrome and as well as chronic indigestion from swallowing too much aluminium last year. However, a small amount of nursing aside, I will be a desperately loyal spouse. Happy to learn Mandarin.”

The sighs of relief from BHP Billiton’s bankers and shareholders and the world’s steelmakers will be almost drowned out this morning by the wails of anguish from Rio Tinto’s bankers and shareholders.

But on balance the world is a slightly better and safer place today after BHP’s board decided to drop the bid for Rio. But not, I hasten to add, for Rio.

Barclays, UBS, HSBC, BNP and Spain’s Banco Santander committed to $US55 billion in debt for BHP through Goldman Sachs and Citigroup in February. There’s no way they would be agreeing to it now, and will be mightily relieved to be out of it (unlike Goldman, Citi and the other advisers have just watched hundreds of millions in fees sprout wings and fly out the window).

The loss of face by new CEO Marius Kloppers is a non-issue. In fact he and his chairman Don Argus come out of the episode with faces fully intact, if not aglow – the offer was a good idea, but dropping it is an even better one.

Yes, Kloppers has been pursuing Rio for 18 months and the bid seems to have been his entire corporate strategy, but like everyone else in business these days he now has to knuckle down and just manage his businesses – capital for acquisitions to bury inefficiencies in greater scale is now too expensive or simply unavailable.

Perhaps the only problem for BHP is that it may end up competing against its Chinese customers. Chinalco wants to increase its stake in Rio to 50%, although that’s different to saying it will be allowed to do so.

Failing a quick bid from the Chinese, Rio has a difficult future. Its shares have now fallen 70%, and have gone from trading at 3.8 times BHP’s price to 1.4 times this morning.

The difference between them is Rio’s acquisition of Alcan. The idea was right, but the price was too high – by a factor of seven, as it turned out. The Rio board is now facing massive write-downs of the carrying of the Alcan assets and the millstone of $42 billion in debt that will now not be refinanced by Barclays et al as part of a BHP takeover.

And as my colleague Stephen Bartholomeusz pointed out, about $US9 billion of the Alcan debt needs to be refinanced next October.

As a result Rio faces a more difficult 2009 than most, which is saying something.

This first appeared on Business Spectator


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