A union between BHP and Rio would create the world’s largest coking and thermal coal producer, the biggest copper producer and an equal leader in iron ore production next to CVRD.
Contemplating a Rio takeover, Citigroup said while the company’s strong cash flow could attract private equity firms, its synergies with BHP through existing joint ventures and Australian coal and iron ore assets were hard to ignore.
With a market capitalisation of around $US80 billion, Rio would call for bids of more than $100 billion-plus through debt and equity.
“The main barrier for other potential bidders like Anglo, Xstrata and private equity is the perceived loss of Australian control of key iron ore assets,” the analysts said.
Because neither Anglo American nor Swiss-based Xstrata have a listing in Australia, nationalistic protection issues would also be a concern for the Government.
“Strategic and diversification drivers could prompt other corporates to bid, but ultimately BHPB can pay the most given it has the most synergies to extract,” Citigroup said.
While major global oil companies like BP and Royal Dutch Shell have the size and balance sheet capability to entertain such a takeover, Citigroup said they are unlikely to return to the sector after exiting the space in the 1980s and 1990s.
“In our view this leaves BHP Billiton as the most likely bidder,” Citigroup said.
“BHPB is the largest metals and mining stock with a market capitalisation of [up to] $136 billion, has the advantage of a dual-listed structure that could allow it to offer scrip in both markets, is still considered to be largely an Australian company to counter the nationalistic control issues and has the most synergies to extract through existing JVs and from the Western Australian iron ore mines.”
Rio Tinto shares shot up $3.36 or 3.8% to an all-time high of $91.32 yesterday amid the takeover speculation, and were trading at $90.84 mid-morning today.
BHP also gained 26c to $31.56 yesterday and are trading at $31.32 this morning.
