Miners Fair Game For Private Equity, Says Citigroup
The Age
Wednesday August 23, 2006
IT IS hard to imagine BHP Billiton facing a private equity bid, but the world's biggest investment bank, Citigroup, says it is possible.
In fact on Citi's number work, both BHP Billiton and Rio Tinto are private equity leveraged buy-out money for jam.Both groups are now "in leveraged buy-out (LBO) territory," Citi's European metals and mining research team says in a report this week. Its LBO modelling suggests that private equity firms could buy BHP for $US140 billion and lock in a 28.5 per cent return on the investment, and buy Rio for $US83 billion and generate a 26.6 per cent return, simply by gearing the balance sheets of the resources giants and hedging (forward-selling) future metals and commodities output. Half of the purchase prices would come from borrowings.Citi says that in many ways the mining giants are classic buy-out targets. They have enormous cash flows, low capital expenditure relative to the amount of cash they are throwing off as Chinese demand continues to underpin prices, and balance sheets that can support much more debt than they are carrying. Debts in the mining industry are low, and falling quickly: BHP's debts were 57 per cent of its assets a year ago after the $9.2 billion cash takeover of WMC, and will likely fall below 40 per cent this year. Rio is effectively debt-free. BHP chief executive Chip Goodyear won't be having nightmares about Coles' suitor, Kohlberg Kravis Roberts, yet. As Citi notes, the sheer size of BHP and Rio is a deterrent, and so is the political heat the bid would generate. Citi's sums do put the big miners on notice, however. When returns as good as the ones Citi predicts are available from balance-sheet engineering, doing nothing with the huge cash flow the commodities boom is generating is simply not an option. The Maiden family owns BHP shares.
© 2006 The Age
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