rio and bhp, page-15

rumours rumours:

Talk swirls again of BHP bid for rival Rio Tinto

Thursday November 8, 2007, 4:25 pm


By James Regan

SYDNEY, Nov 8 (Reuters) - Speculation BHP Billiton Ltd/Plc (ASX: BHP.ax) BLT.L will bid for Rio Tinto Ltd/Plc (ASX: RIO.ax) RIO.L to create a $300-billion-plus mining behemoth is gaining fresh currency after Rio sealed it purchase of aluminium group Alcan.

Media reports in Britain and Australia suggested BHP, the world's largest miner, was on the verge of launching an unsolicited offer for No.3 ranked Rio after Rio completed its $39.1 billion purchase of Alcan on Wednesday.

"The rumour has lingered around longer that you'd normally expect. You could say that there is no smoke without fire and I could see the sense in that happening," said Peter Wright, dealer at Burrell & Co. in Brisbane.

A marriage between BHP, worth around $220 billion, and Rio, valued at $121 billion, would assemble a massive controlling force across a range of industrial-use commodities, such as copper, aluminium, iron ore and coal but would likely face competition concerns.

Talk first swept markets in May that BHP was readying a hostile bid for Rio after it had rebuffed a friendly offer of A$100-A$110 per share, which was above Rio's share price at the time. Rio later said it had received no such offer and the speculation faded.

Rio was up 1.4 percent at A$113.73 in afternoon trade in Sydney, after its London shares gained less than 1 percent on Wednesday.

BHP's Australian stock was down 3.9 percent at A$43.10 following a 1 percent loss in London, in an overall market .AXJO down 2.8 percent.

Based on the Sydney and London closing prices, the combined market value of BHP and Rio is about $341 billion, which would put it on a par with Microsoft MSFT.O.

Rio's stock trades on the most attractive valuation multiples of the big diversified mining houses, and is on average 19 percent cheaper than BHP, according to UBS.

Some analysts estimate fair value for Rio at up to 28 percent above current prices, or more than $150 billion.

ALCAN DEBT

Rio has assumed billions of dollars in fresh debt to pay for its purchase of Alcan, while BHP has been absent from the M&A scene for years, watching rivals such as Rio, No.2 ranked CVRD VALE5.SA and Xstrata XTA.L grow through acquisitions.

The Australian Financial Review in an unsourced report suggested BHP's new chief executive Marius Kloppers "is keen to stamp his mark on the mining giant through a company-transforming acquisition".

Not everyone agrees.

"I don't think Marius has his legs under the table yet," said sector analyst Ray Chantry of Baillieu Stockbroking EL&C in Melbourne, who thinks Xstrata is a more likely target for BHP in the longer term.

BHP's profits this year, fuelled by booming demand for commodities from emerging economies such as China and India, are expected to rise to almost twice its debt load.

Rio and BHP declined to comment on the latest reports.

Both companies compete in iron ore mining in the Australian outback and vie for customers for the shiploads of coal, uranium and other minerals each sells into to Asia, Europe and North America each year.

"There would be regulatory hurdles. In copper, aluminium and coal, as well as iron ore, they may be bumping up against what is allowable...The steelmills in particular would be up in arms," an Australian analyst said on condition of anonymity. ($1=A$1.08)