KEY POINTS:
PERTH - The world's biggest miner, BHP Billiton, is well placed to take out rival Rio Tinto in a deal that could cost over A$122 billion ($136.4 billion).
Citigroup analysts say Rio Tinto's strong cashflow could make it an attractive takeover target for private equity firms, but BHP Billiton would be a more likely bidder given the likely synergies that could be generated.
"Rio Tinto's strong cashflow and nominal gearing may bring it into the crosshairs of private equity, but we think BHP Billiton is a much more likely bidder given synergies and nationalistic control issue of Australian assets," Citigroup said.
"Applying even a modest bid premium means that any party will need to finance US$100 billion-plus [$135.5 billion-plus] through debt and equity." Citigroup said the disposal of non-core assets could overcome the competition concerns.
A union between BHP Billiton and Rio Tinto would create the world's largest coking coal producer, the biggest thermal coal producer and the largest copper producer and position the company as the equal largest iron ore producer.
"The greatest gains would be achievable in the iron ore assets in the Pilbara through optimising product specifications, mining fleet, rail distances to the port, etc," Citigroup said.
"Considering the scale and importance of these businesses to both companies, it is hard not to see US$500 million-plus in synergies and cost savings in this area alone."
The brokerage said cost savings and synergies would also be achieved at the Australian coal assets, Canadian diamond mines, product marketing, logistics and global procurement.
Citigroup ruled out any interest in Rio Tinto from the major oil companies and suggested private equity would need to team up with an existing industry player to formulate a potential bid.
-AAP
