bhp may renew bid for rio - ubs says

By Jean Chua

Jan. 20 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, may make a fresh offer for Rio Tinto Plc should shares of the London-based company continue to decline, UBS AG said.

BHP has “significantly outperformed” Rio Tinto since it dropped its offer for the company Nov. 25, analyst Paul Galloway said in a note yesterday. Rio Tinto is trading at a 26 percent discount to BHP on a future earnings basis, UBS said.

“While we acknowledge that BHP is better financially positioned during the present climate, we view the discount that Rio trades at as excessive,” Galloway wrote in the report. “If the equity market continues its indifference to the Rio story then BHP may consider making a fresh offer for Rio at some future date.”

Rio Tinto has fallen 40 percent in London since Nov. 25 when BHP abandoned a hostile bid, citing Rio’s debt, regulatory hurdles and falling commodity prices. Rio said in December it would sell $10 billion of assets, slash spending by $5 billion and eliminate 14,000 jobs to cut $38.9 billion of debt.

BHP cannot make another offer for Rio until 12 months have elapsed since the original bid was withdrawn, according to U.K. Takeover Panel regulations.

UBS cut its rating for BHP Billiton to “neutral” from “buy” and reduced its 12-month share price estimate to 1,300 pence from 1,600 pence. The bank kept its “buy” recommendation and target price of 2,200 pence for Rio Tinto.

“We still see upside in BHP, but we believe greater upside lies with Rio due to what we believe are overdone concerns about Rio’s cash flow and gearing,” Galloway said. Rio Tinto has sufficient cash flow between now and October to pay down $10 billion of debt due then, and doesn’t need to raise equity, Galloway said.

To contact the reporter on this story: Jean Chua in London at [email protected]

Last Updated: January 20, 2009 04:29 EST