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Financial Times: Industry digs in as turf war looms

EXTRACT: BHP has denied rumours that it was planning to put BHP Petroleum up for sale. But if circumstances change, BHP Petroleum would attract a wide range of bidders, including some of the world’s biggest oil companies such as ExxonMobil and Shell. PetroChina would also join in such an auction.

THE ARTICLE 

By Lina Saigol
Published: November 19 2007 02:00 | Last updated: November 19 2007 02:00

BHP Billiton’s attempted takeover of Rio Tinto has set in motion a complicated set of variables that could result in consolidation of the entire mining sector in the next few years.

Rio is exploring several possible alternatives to engaging with BHP, after rejecting the $67bn takeover proposal last week on the grounds that it significantly undervalued Rio Tinto and its prospects.

The most extreme option would be for Rio to reverse the situation and launch a counterbid for BHP. But because of the difference in market capitalisation of the two mining groups – Rio is capitalised at $152bn, BHP at about $203bn – to make a so-called “PacMan” defence work, Rio would need to team up with rival miners to be big enough.

A more feasible option would be for Rio to threaten to tie up with Companhia Vale do Rio Doce of Brazil, which has a market capitalisation of about $170bn.

CVRD is understood to be deeply unhappy about the possibility of losing its dominant position as the world’s largest iron ore producer and is trying to find a way of participating in this consolidation round. The Brazilian miner would be particularly keen on having access to Rio’s copper, coal and aluminium assets, although such a union would encounter competition issues in iron ore.

If Rio is not interested in such a pairing, CVRD could take control of the situation and team up with either Xstrata or Alcoa and engineer its own break-up of the Anglo-Australian miner. The three groups could then divide Rio’s copper and iron ore assets between them, and Alcoa would get Alcan.

If BHP simply raises its offer for Rio and that deal is recommended, CVRD will have to turn its focus elsewhere and look at making a more lateral acquisition, such as for Freeport-McMoRan. Buying Freeport, which spent $26bn to acquire rival Phelps Dodge last year, would help the Brazilian group build its position in base metals.

Another possible merger would involve a bid by Xstrata for Anglo-American, which is in the middle of a restructuring that includes the demerger of Mondi, its paper business, and a sale of Tarmac, its construction materials arm.

According to the research team at Credit Suisse, if Xstrata offered £42 a share for Anglo, in cash and shares, it could enhance its own earnings by 5 per cent.

It could make more sense for Xstrata to launch a bid for Lonmin to build scale in the platinum market. The research team at UBS believes that Lonmin is a possible acquisition target for “anyone believing that long-term platinum prices could be higher than current spot prices”.

ArcelorMittal is another powerful player unlikely to sit still during this phase of consolidation. On Wed-nesday, the steel group said it was keeping a close eye on developments with BHP’s offer.

The Chinese, Indians and Russians are also keen to participate in any industry shake-up. Last week, Alexei Mordashov, head of Severstal, said he was interested in buying control of Highland Gold. The Russian steelmaker has already made a bid for Celtic Resources Holdings, but that looks only the beginning of its mergers and acquisitions strategy.

Vedanta Resources, India’s largest producer of copper and zinc, has global ambitions. And analysts have also suggested that Norilsk Nickel or Rusal could be interested in Anglo-American.

The team at Exane BNP Paribas point out that a state-owned Chinese company, such as Chalco, could look at securing a blocking stake in either BHP or Rio, as a way to maintain some sort of competition in key segments such as iron ore. But it is unclear what stake would be necessary to achieve this, or how the Australian government would react to such a transaction.

With the weakness of the US dollar, several smaller American companies could become takeover targets for foreign bidders. The team at Jeffries & Co believes companies that produce raw materials for steel-making, such as metallurgical or coking coal and iron ore, are particularly attractive. Names in the frame include Cleveland Cliffs and Allegheny Technologies.

Rio Tinto has also said it plans to sell Alcan’s packaging business, which is valued at about $5bn. Rio could also sell some of Alcan’s electrical cable business

Once the credit markets stabilise, private equity could also make an appearance in this consolidation game by picking off noncore assets of which any of the merging companies may be disposing.

BHP has denied rumours that it was planning to put BHP Petroleum up for sale. But if circumstances change, BHP Petroleum would attract a wide range of bidders, including some of the world’s biggest oil companies such as ExxonMobil and Shell. PetroChina would also join in such an auction.

Copyright The Financial Times Limited 2007

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