Saturday, July 14, 2007

BHP-Billiton rips

When the mighty BHP-Billiton was formed several years ago I criticised the arrangement on the grounds that (i) there was an evident lack of 'economies of scope' - the firms had a commodity specialisation that lay in different areas and, (ii) the advantage offered to Billiton unfairly disadvantaged BHP shareholders. These criticisms might still be true but it is evident that this firm is one hell of a colossus.

The current issue of Fortune lists characteristics of the world's largests corporations - the Global 500. BHP-Billiton is listed as 205th largest company on the planet in terms of revenues (at $32 billion US these are less than 10% of Wal-Mart) but in terms of profits BHP-Billiton is 27th. In terms of rate of return on revenues it is the 6th most profitable large firm on the planet. As a miniming venture BHP-Billiton is easily the most profitable private company on the planet.

On Friday BHP-Billiton's share price came close to $40 up from around $25 at the start of the year. At $40 it would be selling at around 13X earnings which does not look that expensive. Some think that the commodity boom want last forever and I agree. But it will be around for a quite a while. At least that is the implied optimistic expectation of Rio Tinto given its huge ($38b US) and seemingly expensive offer for Alcan. The assumption here must be that the boom will last.

There have been some rumours that BHP-Billitoon might make a higher bid for Alcan but this seems doubtful to me as the greater synergies lie in Alcan being part of Rio Tinto. But wouldn't it shock the world if BHP-Billiton eventually turned around and took a bite a Rio Tinto. It is not impossible. The combined group would then dwalf by a mile Anglo American in terms of revenues gained

Update: An interesting aricle in The Australian looks at the option of BHP taking out Alcoa for $US55 per share in a deal that would be worth $US50b. If as seems likely Rio gets Alcan it will become the biggest aluminium producerbut if BHP then grabbed Alcoa it would again be largest.

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