Key For Rio Is To Demonstrate Its Hidden Value

RELATIONSHIPS can change the course of history. Remember the special relationship between Tony Blair and Bill Clinton and then with George W Bush? It forged an alliance that took both countries into a war with Iraq and divided the world.

The same can be true in business, where the relationship between a chairman and chief executive can also change history. We are witnessing that now with BHP Billiton’s all-share £81billion move on Rio Tinto, a deal which, if successful, would be the world’s second biggest, and change the global landscape of mining.

Don Argus, BHP’s 69-year-old Australian chairman, would love to acquire Rio and run the enlarged company from his headquarters in Melbourne. In the process he would also love to put a dent in London’s reputation as the world’s mining capital.

Argus has not got much to lose. If the bid fails he will lose a job he is close to stepping down from, and even if he wins he won’t remain in situ long enough to see how successfully the two companies are integrated.

With BHP’s new chief executive, Marius Kloppers, Argus has a new colleague with the ambitions to match. Under the more measured approach of Kloppers’s predecessor, Chip Goodyear, this deal – which is likely to go hostile – would have only been pursued on friendly terms.

The prize is big and the synergy benefits well north of the $1 billion (£477m) that has so far been mooted – and BHP is about the only company capable of pulling this off.

It has the same dual-listed structure, it is big enough to attempt it, and it is using equity that would be acceptable to Rio investors. But it still remains highly questionable whether it is doable.

At Rio, chairman Paul Skinner and his new chief executive, Tom Albanese, have no doubts what this contest is about. It is to demonstrate the hidden value in the group’s international assets, something that is not yet reflected in the share price.

In the past, the company has been too conservative, its in-house mantra has been that publicity follows achievement. That has to change and so does the group’s silo structure, which has eroded some of the benefits of the group’s global scale.

Rio’s three big steps will be to demonstrate the cyclical benefits of its product mix, show the market what is yet to come from its recently acquired takeover of Alcan, which made it the world’s biggest aluminium producer, and finally provide an insight into the value of its undeveloped assets.

Skinner has said BHP’s sighting shot of £48 per share is derisory. What the coming months will be about is how much higher it should be pitched.

With the mining cycle still in full swing, combined with China’s insatiable asset for iron ore, the take-out price could be rich indeed.

Yawning Gulf

THE decision by the Qataris to abandon their protracted takeover battle for J Sainsbury was a timely reminder that Middle Eastern investors don’t want to be taken for mugs.

They may have pots of money, but they have other targets in sight and don’t want a reputation for having deep pockets but no financial acumen.

The Qataris and their London-based bid vehicle, Delta Two, will have regrets. But with the Sainsbury take-out price at 600p and credit markets in disarray, in the end the sums did not add up.

The amount of equity needed to finance the deal went up from £3.6 billion to £5 billion, the debt costs increased by 20% and the amount required by the pension-fund trustees was 300% higher than that envisaged at the outset.

Sainsbury’s share price since the deal was abandoned says it all. It is now down to 427p, valuing the company at £7.5 billion, lower than the £8.6 billion book value of its property assets.

The Qataris retain a 25% stake in the business, which may be under water but can be held for the long term.

During the height of the bid battle the Sainsbury family, which still holds 18%, were suggesting the stock was worth as much as 700p. They are looking pretty stupid now. The group’s shares won’t even see 600p again for at least two years.

The immediate job for Justin King, the supermarket group’s chief executive, is to motivate about 1,000 store managers who have missed out on average payments of £150,000 each because the deal fell apart.

He then must increase the return on capital. At this share price, with the money the group is making, he would do just as well to rent out the stores.

Banking jitters

WHY bother putting your money in the bank when you can buy one for the same price?

Investors in both Royal Bank of Scotland and Barclays are now seeing their shares trade on virtually the same yield as their dividend. At Barclays, the p/e is 7 and the yield is not far behind.

What this is saying is that investors are nervous about the banks’ earnings outlook going into 2008 and 2009, and fear they john.waples@sunday-times.co.uk won’t sell as many products in the retail and capital markets. Because of this, hedge funds are taking advantage to push down financial stocks – as we saw on Friday when shares in Barclays were forced to be briefly suspended.

The cue for confidence in the UK banking sector is when the American value investors start buying in. The punishment being meted out has lost all connection with reality.

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