BHP Billiton (BHP) And Rio Tinto (RTP): Why Create A Giant?

BHP Billiton (BHP) has offered to buy rival Rio Tinto (RTP). BHP has a market cap of $230 billion. And Rio’s is $115 billion. Both stocks are moving up on the news. A combined company could be worth more than GE (GE).

Why? Most mergers don’t work. Why buy a rival?

In the industrial part of the global economy, which is probably shrinking outside China, economies of scale can still make sense. With dozens of mines around the world, processing facilities and transportation channels, both RTP and BHP both spend billions. The cost of revenue at BHP was over $20 billion last year. Any improvement in that number in a consolidation goes straight to the bottom line.

The deal makes sense for much the same reason that Alcoa (AA) wanted to buy Alcan (AL). There may be $5 billion in low hanging fruit represented by overlapping costs. The companies are that big and have that many duplicated expenses in mining, processing, and transporting their products.

A merger of BHP and RTP make a ton of sense.

Douglas A. McIntyre