Dec. 10 (Bloomberg) -- Blackstone Group LP is planning a bid for Rio Tinto Group that may include China's sovereign wealth fund, the Daily Telegraph reported, without saying where it got the information.

Blackstone has appointed lawyers and is in talks with banks and public-relations companies for the potential offer, which would compete with a $137 billion takeover proposal from BHP Billiton Ltd., the London-based newspaper said. New York-based Blackstone is manager of the world's largest leveraged buyout fund.

China Investment Corp., which paid $3 billion in May for a 9.4 percent stake in Blackstone, denied this month that it may bid for Rio. A BHP takeover of London-based Rio would concentrate supply of copper, iron ore and coal and may spur Chinese companies to step up global takeovers to secure raw materials.

``I don't think China Investment Corp.'s current position in Blackstone is big enough to use Blackstone as an investment tool,'' said Lu Yizhen, who helps manage $640 million at Citic Prudential Fund Management Co., in Shanghai.

Rio rose as much as A$2.40, or 1.7 percent, to A$147.88 and traded at A$147.11 at 2:59 p.m. Sydney time on the Australian Stock Exchange. BHP rose 0.4 percent to A$43.69 at the same time, valuing its offer for Rio's Australian shares at A$131.40.

Liu Hui, a spokesman for the Chinese fund, BHP spokeswoman Samantha Evans and Blackstone's John Ford all declined to comment on the Telegraph's report. Rio doesn't comment on market rumor or speculation, spokeswoman Amanda Buckley said.

Debt Funding

Banks have slowed lending to finance buyouts as losses from the U.S. subprime mortgage market led to $65 billion of debt- related writedowns. SP AusNet, an Australian energy distributor, today scrapped a proposed A$8.3 billion ($7.3 billion) purchase of assets from its parent company, citing deteriorating debt markets.

``Most of these acquisitions by private equity require debt so we'll have to see what funding exists,'' said Jason Teh, who helps manage the equivalent of about $5.3 billion at Investors Mutual and holds Rio and BHP. ``The question is whether debt funding an acquisition in this type of environment is feasible.''

The perceived risk of Rio Tinto defaulting on its debt, as measured using credit-default swaps, increased about 4 basis points to a record high 83 basis points at 2:35 p.m. in Sydney, Citigroup Inc. prices show. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt.

Investors use the contracts to speculate on credit quality and the costs, or spreads, increase as the perceptions of credit quality deteriorate.

Blackstone co-founder Stephen Schwarzman said last month rising borrowing costs are crimping the pace of large leveraged buyouts. Buyout firms relied on cheap debt in the past two years to finance record deals.

Baosteel Denial

Baosteel Group Corp., China's biggest steelmaker, on Dec. 7 denied a Dec. 4 report in the 21st Century Business Herald, citing Baosteel Chairman Xu Lejiang, that it plans a bid for Rio. BHP's proposal for Rio, the world's third-largest mining company, is ``dead in the water,'' Rio's Chief Executive Officer Tom Albanese said last week.

``There are rumors all over the place at the moment and nothing is absolutely impossible,'' Peter Chilton, who helps manage $1.4 billion at Constellation Capital Management, said today by phone from Sydney.

Blackstone may seek to reverse Rio Tinto's $38.1 billion purchase of Alcan Inc. in October and sell its iron-ore business, which it values at $110 billion, the paper said.

The reported sell-off of Rio's iron ore unit ``doesn't really make sense,'' Constellation's Chilton said. ``China is better off letting someone else supply it rather than getting involved.''

Officials Argue

BHP's three-for-one stock offer is too low, Perennial Investment Partners Ltd., Argo Investments Ltd. and Baker Steel Capital Managers LLP have said. BHP needs to come back with an offer of 3.9 shares for every Rio share to get Rio to engage, Austock Securities Ltd. said Dec. 3.

China Investment, which manages $200 billion of the nation's reserves, said in October that it will use about $67 billion to invest in financial assets around the world.

The Chinese government is undecided over the fund's best use -- some officials argue the money should be invested for strategic aims, while others advocate a ``returns-driven'' approach to avoid foreign concerns, the Wall Street Journal said Sept. 13.

``If China Investment Corp. directly bids for Rio, that's obviously a government move and would be rejected by Australia,'' said Citic Prudential's Lu.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net

Last Updated: December 9, 2007 23:44 EST