BHP Billiton could afford a 4.25-for-one offer for Rio Tinto, advisers to Rio have calculated, which would be worth more than $157 billion.
The share swap figure, cited in The Australian Financial Review and The Australian newspapers, marks the first time Rio has flagged what it might consider a fair bid since rebuffing a proposed three-for-one swap, then worth about $139 billion, from the world's biggest miner last November.
Rio Tinto spokesman Ian Head declined to elaborate on the reports, one week ahead of Feb. 6 deadline for BHP Billiton to decide whether to make a formal offer or walk away for at least six months, under a deadline from the UK Takeover Panel.
"That's like Rio putting down some opening shot in a way unofficially. They are dancing around each other at the moment," said Robert Hook, a portfolio manager with S.G. Hiscock & Co.
The market on Wednesday did not reflect anything close to a 4.25-for-one valuation on Rio Tinto.
BHP shares jumped 3.1 percent to A$36.80, while Rio rose 2.7 percent to A$116.60, riding strong gains in base metals prices. That valued Rio's shares at 3.2 times BHP's shares, roughly in line with trading over the past two months.
"The market is telling you that the offer next week could be somewhere between the two levels," said Hook, referring to the three-for-one and 4.25-for-one figures.
Fund managers said BHP Billiton was unlikely to make an offer as high as 4.25-for-one.
"There are no other bidders. It's hard to see them bidding against themselves. There's no use pumping up the offer," said a fund manager in Sydney who declined to be identified.
He said Rio Tinto shareholders with lower valuations on the company than Rio Tinto management's view might be willing to sell out for less than 4.25-for-one. "There are a lot of hedge funds on the Rio register. They'd probably go for lower than 4.25."
Australian newspapers said an analysis by Rio's adviser, Macquarie Bank, showed BHP could justify an offer of 4.25-for-one based on Rio's forecast earnings for 2008, expected merger savings and a planned share buyback.
The estimate increased to 5.02-for-one, assuming the market pushed the combined mega-group's value up 10 percent once a deal was completed.
Rio Tinto's chief executive, Tom Albanese, last week told Reuters that BHP's proposed three-for-one share swap was "two ball parks" away from a fair bid.