JOHANNESBURG Mining group BHP Billiton (BLT.L) (BHP.AX) is set for a make-over if it manages to gobble up Rio Tinto (RIO.L)(RIO.AX), jettisoning a range of mines to focus on core operations.
BHP Chief Executive Marius Kloppers has said creating a simple management structure will be a high priority if it acquires Rio and analysts say disposals will also help pay off any debt taken on during a takeover.
In addition to $15 billion worth of sell-offs that Rio has already identified, BHP would target higher-cost or marginal operations in the merged group, but would retain its petroleum unit for the time being, analysts said.
Other mining companies such as Anglo American (AAL.L) and Xstrata XTA.L would snap up morsels shunted off by BHP if they fail to achieve a major takeover of their own.
Kloppers reassured investors this week that the firm's all-share takeover proposal for Rio would not create an unwieldy behemoth with hundreds of assets spread across the globe.
"We want to be simple, we want... ever larger assets -- fewer of them if we can so they are easier to manage," he told a presentation where he pushed the case for buying Rio.
When BHP merged with Billiton in 2001 to create the world's largest mining group, the firm sold off operations in stainless steel, long steel products, metal distribution and smaller coal assets, Kloppers has reminded investors.
Rio has repeatedly spurned BHP's 3-for-1 share takeover proposal, saying it fundamentally undervalues Rio and its growth prospects.
DIAMONDS TO BE SOLD?
Besides creating a simpler structure, spinning off units could help BHP reduce $70 billion in debt it is arranging for a possible takeover, said John Meyer, head of resources in London at investment bank Fairfax IS.
BHP is arranging the big debt package so it could refinance $40 billion in Rio debt and implement a promised $30 billion share buyback after a takeover.
"Repayment of a $70 billion facility would require significant disposals and the continuation of near peak earnings for some years to come to reduce this level of debt to more prudent levels," Meyer said in research note.
"BHP could sell its ‘star performing' petroleum business to cover much of the debt but it might be better for shareholders if BHP invested further in the growth of this division which has so successfully set BHP apart from its peers."
Any spin off the petroleum unit would occur several years down the line after a strong growth period for the unit, where production is due to jump by 50 percent by 2010, another analyst said.
"What you would see a lot of is getting rid of those smaller assets. Maybe industrial minerals, maybe diamonds," said the analyst in Johannesburg who declined to be named.
BHP Billiton's diamonds and specialty products unit accounted for only 2 percent of the group's 2007 revenue.
Among a range of operations Rio has already put up for sale is Rio Tinto Energy America, a unit that sells coal for power generation. If BHP bought Rio, it could add its own energy coal operations and sell both of them together, analysts said.
BHP might also want to sell off Rio's uranium operations in Namibia and Australia to better focus on its Olympic Dam mine, which has the world's biggest uranium resource.
"You might have Xstrata and Anglo lining up to get some pure uranium exposure," an analyst said.
(Editing by David Cowell)