Rio Tinto chief Albanese’s downfall a cautionary tale of bad acquisitions – by Peter Koven (National Post – January 18, 2013)

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When Tom Albanese made the rounds in 2007 to promote his US$38-billion takeover of Alcan Inc., the chief executive of Rio Tinto Ltd. always told a good story.

He talked about the phenomenal growth rates of emerging markets, and his belief that China would transition from a being a net exporter of aluminum into an importer as its domestic production could not keep up with demand. As that happened, he was confident aluminum would outperform other commodities.

Despite his best efforts, Mr. Albanese was never able to convince the many skeptics among his shareholder base. They worried that Alcan was a classic example of the debt-fueled, top-of-the-market acquisition that always comes back to haunt the CEO who makes it. Of course, they were right.

Mr. Albanese lost his job on Thursday as London-based Rio announced up to US$11-billion of writedowns on its aluminum business and a US$3-billion writedown on recently acquired coal assets in Mozambique.

Rio Tinto has now taken a mind-boggling US$30-billion (give or take) of Alcan-related writedowns, which is more than three-quarters of the total acquisition value. The deal is, if nothing else, a cautionary tale for executives to avoid getting carried away during a bull market.

The trigger that ultimately led to Mr. Albanese’s ouster was the surprise writedown in Mozambique. Rio acquired control of the assets less than two years ago for about US$4-billion, and is now having to write off most of their value because of coal recovery problems and infrastructure constraints. Writedowns on Alcan are nothing new and hardly surprising anymore, but the Mozambique debacle was more than the board could tolerate.

BMO Capital Markets analyst Tony Robson noted that Mr. Albanese provided a “steady hand” in guiding Rio Tinto in recent years following the “disastrous” Alcan acquisition. That is unquestionably true, as he fixed the balance sheet and made some smart investments. But Alcan was always going to hang over him.

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