RPT-UPDATE 2-Australia's AWB in merger talks with ABB Grain

(Repeats to more sbuscribers, adds analyst comment, share prices)

By Bruce Hextall

SYDNEY, Nov 28 (Reuters) - Australian wheat exporter AWB Ltd (AWB.AX) said on Friday it is in merger talks with rival ABB Grain Ltd ABB.AX, with a deal likely to create the nation's largest wheat and barely exporter with a market value of over $1.4 billion.

Analysts have been betting on consolidation in Australia's newly deregulated grain industry as local players eye global expansion and seek to bulk up to compete better with commodity trading giants such as Cargill Inc [CARG.UL].

AWB said in a statement the merger discussions were ongoing, but did not give further details. Both AWB and ABB have a market value of A$1 billion each. "The transaction will only progress if appropriate terms can be agreed and due diligence is completed to each party's satisfaction," AWB said.

A possible merger would give both companies geographic diversification and a wider product mix.

Shares of AWB and ABB rose and pulled other grain groups up on speculation of more consolidation.

At 0045 GMT ABB was up 23.27 percent at A$8.01 while AWB had risen 10.3 percent to A$3.52. GrainCorp Ltd (GNC.AX) was up 3.8 percent at A$5.49 while Futuris Corp FCL.AX, which owns the Elders agribusiness, had risen 3.8 percent to A$5.49.

"With deregulation Australian grain companies need to reach scale to compete with the international trading giants," said Ross Macmillan, an analyst at stockbroking firm E.L. & C Baillieu.

"The tie-up will be highly considered by the market as they need to get to that sort of scale to compete on the global market."

He said third-ranked GrainCorp had been considered a likely target for its larger rivals ABB and AWB though there was logic in a combined ABB/AWB group.

"It is possible that GrainCorp might be taken over later by the merged group," Macmillan said.

AWB was stripped of its monopoly on Australian wheat exports earlier this year following a scandal involving illegal payments to the former Iraq government of Saddam Hussein.

Th Australian government deregulated the country's wheat export trade on July 1.

"It could be any combination, there are four grain groups but there's some that make more strategic sense than others --- AWB and ABB would be a good combined business," Belinda Moore, an analyst at ABN AMRO Morgans said.

A merged group would be ranked among Austraila's top 200 companies with a combined market capitalisation of about A$2.46 billion ($1.61 billion).

Discussions have been underway for some time which are expected to led to a share swap deal.

Macmillan said the combined group would have an up-country silo network stretching through Australia's eastern states into South Australia where ABB was based.

The deal would give AWB access to ABB's strategic ports, storage and handling assets while ABB would gain access to AWB's distribution lines to farmers through AWB's Landmark rural services businesses.

Analysts expect cost savings of at least A$35 million a year were likely to flow from the merger, with a key benefit being a strengthened trading position in the global market, backed up by access to a large portion of Australia's grain crop.

AWB is being advised by Deutsche Bank AG while ABB has appointed Goldman Sachs JBWere as its advisor. ($1=A$1.52) (Editing by Kim Coghill)