BHP Billiton / Rio merger could spark sector consolidation

Standard & Poor’s (S&P), the credit rating agency, has warned that a merger between BHP Billiton and Rio Tinto might mark the start of further consolidation in the mining industry.

Should this be the case, the agency believes that the sector could become vulnerable to credit rating downgrades if the world economy slows down.

Trevor Pritchard, head of metals and mining at S&P, believes that “the prospects for further consolidation in the mining industry are high” because a merger between BHP and Rio would make other companies in the metal and mining sector “consider their options”.

Future mergers and acquisitions could lead to downgrades and credit-watch placements because the transactions would be financed with debt

Should the US economy perform badly, global demand for base metals and bulk commodities could fall, creating an impact on cash flows and debt servicing.

S&P is forecasting a 40% risk of a recession in the US, whilst predicting that US GDP will increase by 1.9% in 2008 (down from 2.1% in 2007 and 2.9% in 2006).

BHP Billiton proposed its takeover of Rio Tinto in early November but Rio has so far rejected any approach.

Its chief executive is campaigning for a revaluation of Rio that could mean BHP would need to increase any offer by around 20%.