Talk swirls of BHP bid for Rio Tinto

By James Regan of Reuters 

Speculation that BHP Billiton Ltd will bid for Rio Tinto Ltd to create a $US300-billion-plus mining behemoth is gaining fresh currency, after Rio sealed its 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 $US39.1 billion ($43 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 $US220 billion, and Rio, valued at $US121 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 $100-$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 per cent at $113.73 in afternoon trade in Sydney, after its London shares gained less than 1 per cent on Wednesday. 
BHP's Australian stock was down 3.9 per cent at $43.10 following a 1 per cent loss in London, in an overall market down 2.8 per cent. 
Based on the Sydney and London closing prices, the combined market value of BHP and Rio is about $US341 billion, which would put it on a par with Microsoft 

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

Some analysts estimate fair value for Rio at up to 28 per cent above current prices, or more than $US150 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 and Xstrata 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.