CreditSights sceptical on 'transformational' deal for BHP

Investment researcher CreditSights has questioned reports that mining major BHP is gearing up for a "transformational merger and acquisition (M&A)" deal.

News outlet Bloomberg earlier this week reported that BHP was beefing up its deal-making team, and was looking at pursuing a transformational transaction. The company is reportedly evaluating rivals including Freeport-McMoRan and Glencore, although there is no indication that any bids are being prepared as yet.

CreditSights said in a note that while BHP had the financial wherewithal to acquire a company the size of either Freeport or Glencore, prospects for a transformational acquisition were "relatively remote" given the high valuations in the mining sector currently, and the declining growth trajectory of China, the sector’s largest consumer.

“Still, it is hard to fully discount this speculation with BHP having a history of making large but failed M&A attempts, including BHP bids made for Rio Tinto in 2008 and for Potash Corp in 2010. We believe a BHP bid for Freeport would make more sense than a bid for Glencore or Vale, given BHP's desire to add exposure to copper,” CreditSights said in its note.

“Both Glencore and Vale have copper assets as well, but Glencore also has exposure to coal which BHP is trying to get rid of, while a BHP/Vale combination may run into regulatory issues given the heavy concentration in iron-ore. That said, we're not sure if Freeport is for sale. As a reminder, Barrick's CEO Mark Bristow had talked openly about acquiring Freeport over the last several years, but ultimately backed off from making a bid given the valuations and wide bid/ask spread.”