BHP may have to sweeten again to budge Rio: analysts

By James Regan

SYDNEY (Reuters) - A day after BHP Billiton Ltd/Plc launched the second costliest corporate takeover in history, analysts and industry executives reckoned the world's biggest miner may have to dig a little deeper into its pockets to win rival Rio Tinto Ltd/Plc <RIO.AX><RIO.L>.

"I still don't think it's good enough for BHP to win the day, given Rio's assets and potential," said DJ Carmichael & Co analyst James Wilson.

BHP's <BHP.AX><BLT.L> offer, worth around $130 billion based on Thursday's share prices, would be the mining sector's biggest ever deal and create the world's third-biggest company after ExxonMobil <XON.N> and General Electric <GE.N>.

Rio has rejected BHP's sweetened 3.4 shares for each Rio share offer, a 13 percent improvement on its initial informal approach in November.

BHP ended Australian trade 0.7 percent higher at A$36.92 on Thursday. Rio eased 0.1 percent to A$127, holding at around 3.44 times BHP's share price, roughly in line with BHP's offer and suggesting the market was not expecting much in terms of a higher offer.

Numis Securities analyst Simon Tyrone said in a report that BHP's bid reflected a high level of discipline on valuation that creates value for both sets of shareholders.

"We are skeptical that BHP would consider increasing their bid meaningfully," Tyrone said, adding he did not see Chinese customers and competitors launching a full counter-bid for Rio.

Asian and European customers of both companies, particularly steel mills in China and Japan that buy hundreds of millions of tonnes of iron ore each year, have raised concerns about the clout a merged BHP/Rio would have on pricing of raw materials.

BHP/Rio would control more than a third of the world's iron ore, a quarter of the uranium and millions of tonnes of copper, aluminum and coal, as well as gold, silver and diamonds.

"BHP would love to have a situation where it can be the dominant player, a one-stop shop, in commodity markets across the globe," said Fat Prophets mining analyst Gavin Wendt.

But a successful bid for Rio "was never going to be easy."

"A company with high quality assets like Rio doesn't come along every day and, with the furious takeover activity in the resources sector over recent years, the cupboard is getting increasingly bare," Wendt said.

State-run Aluminum Corp of China (Chinalco), backed by U.S. aluminum group Alcoa Inc <AA.N>, last week snapped up 9 percent of Rio in a $14 billion raid -- paying a 21 percent premium -- making them the largest shareholding bloc.

Chinalco and Alcoa have reserved the right to make a full bid for Rio, backed by China Development Bank funding, if another bid was made.

"Is BHP the only one who wants to buy Rio?" said Australian mining magnate Michael Kiernan, managing director of Territory Resources <TTY.AX>, which sells millions of tonnes of iron ore to China.

"No, but who else can afford Rio? The Chinese, maybe, but my experience has been they would rather be a partner than an outright owner," he said, adding he has resisted offers from Chinese investors to acquire a stake in his company.

BHP has said it has $55 billion in loans ready to support its Rio bid and would reward shareholders with a $30 billion share buyback if the deal goes through. Rio shareholders would hold 44 percent of a merged entity.

Analysts have suggested BHP would need to pay as much as 3.58 of its shares, plus A$16 cash, to win over Rio.

"BHP may have to raise its offer even more and may have to add a cash component," said Brian Hicks, co-manager of U.S. Global Investors' global resources fund.

BHP Chief Executive Marius Kloppers insists his bid offers fair value. He expects a deal to take up to a year to complete, given the geographic spread of both companies' assets.

Shares in both Rio and BHP were down 1.5 percent in early London trading on Thursday.

(Editing by Ian Geoghegan)