BHP's #15.5bn merger with Billiton to spur world mining consolidation

Australia's largest resources group, BHP Ltd, has confirmed its 28 billion Australian dollars (#15.5 billion) merger with London-listed Billiton to create the world's second biggest minerals and metals giant. The merger is expected to intensify the consolidation within the world mining industry.

The move comes as BHP chief executive Mr Paul Anderson looks to make BHP big enough to grab international investors' attention and Billiton looks to prevent a take-over by its old South African rival Anglo American.

Shares in BHP, which will end up with 58 per cent of the merged company, hit an all-time high on the news. Billiton stock jumped to a year high in London and Johannesburg amid speculation that rival miner Anglo American could now make a bid for Billiton.

"We have to decide whether we are going to participate in industry consolidation and lead it and define the industry, or whether we are going to watch the industry consolidating around us and be a victim of that consolidation," Mr Anderson said.

Mergers have gathered pace in the global mining industry as companies strive to boost their power and presence in the market place. Recent tie-ups include Billiton's purchase of copper miner Rio Algom, Rio Tinto's acquisition of iron ore miner North Ltd and an Anglo-led bid for diamond miner De Beers .

Under the plan, BHP would own 58 per cent and Billiton would own 42 per cent of a merged group, dual-listed in Australia and London, with BHP spinning off its remaining small steel business and completing a A$1.7 billion share buyback by the end of 2002.

Investors applauded the proposal instantly, driving BHP's shares up 5 per cent to a record high of A$22.05 after the announcement. The euphoria eased as investors considered the risk that the deal might not go ahead, and BHP's shares closed up 2 per cent at A$21.40 in a market down 1 per cent overall.

Billiton's shares soared more than 20 per cent to a high of 38.80 rand in Johannesburg and later settled back to hover about 16 per cent up around 37.35 rand. On the London Stock Exchange, its shares were up nearly 14 per cent at 330 pence (523 cents).

The new goliath is set to leapfrog Anglo American and BHP's arch rival Rio Tinto to rank second among global mining and metals firms behind US giant Alcoa.

While analysts viewed Anglo American as a possible counterbidder, they said an offer for Billiton would contradict Anglo's stated aim of diversifying its asset base away from South Africa, and they did not expect Rio Tinto to make a bid.

Based on Friday's closing price for Billiton of 290 1/4p analysts said BHP was paying Billiton shareholders a 20 per cent premium for the leap in rank, but the premium could change on currency and share price moves before the deal closed. The merged group would hold leading positions in aluminium, coal, copper, ferro-alloys, iron ore, and titanium minerals plus major interests in oil, gas, nickel, diamonds and silver, with footholds in the world's three major mining areas - Africa, Australia and South America.

Fund managers and analysts almost unanimously praised the plan on strategic grounds, but were reluctant to comment yet on the valuations or near-term earnings per share impact.

Analysts said the product and geographic mix of the two companies combined would bolster the merged group's muscle to compete in the world's rapidly consolidating mining industry.