Citigroup Analyst: Rio Tinto 'Well Into Leveraged Buyout Territory'

While much of the market may be focused on shares of Alcan Inc. (AL) and its takeover suitor Alcoa Inc. (AA) – itself rumored to be the target of both BHP Billiton (BHP) and Rio Tinto (RTP) earlier in 2007 to help the mining giants boost their aluminum operations – the merger and acquisition frenzy in metals and mining has some wondering who will be next.

The de-rating of Rio Tinto for example, has opened up a value arbitrage and is now “well into leveraged buyout territory,” according to Citigroup analyst Heath Jansen.

“Rio stands out as a potential acquisition candidate, either by private equity or the incumbent mining companies,” he said in a note to clients.

However, the company’s market capitalization of more than US$70-billion is an obvious barrier.

Anglo American (AAUK) has the most to gain in Mr. Jansen’s opinion, since it would diversify the company’s earnings base on a currency, commodity and country basis.

BHP Billiton has the size to buy Rio Tinto, but would likely run into antitrust problems in the iron ore, coking coal and diamond markets, Mr. Jansen said.