Nov. 8 (Bloomberg) -- BHP Billiton Ltd., the world's biggest mining company, plans to pursue a takeover of Rio Tinto Group after an earlier approach was rejected, in what would be the largest acquisition in history.

A purchase of Rio, which has a market value of $159 billion, would create a company that controls more than a third of the iron-ore market, supplies the most energy coal and copper, and owns mines and oilfields in six continents. Rio, the third-largest miner behind Anglo American Plc, surged 21 percent in London trading.

``If the name of the game at the moment is resources in the ground, then why pussyfoot with junior or medium-size miners when you can go to the top?'' said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London. ``This deal will happen, it's just a question of time.''

The combination would be the biggest in a record year for mergers -- the value of transactions through October overtook last year's $3.5 trillion total, according to data compiled by Bloomberg. A successful bid for Rio may eclipse America Online Inc.'s $124 billion purchase of Time Warner Inc. Time Warner is now half the size it was when the deal was completed.

Rio rejected BHP's three-for-one share offer, worth 4,968 pence after BHP stock declined 5.7 percent today. Rio shares advanced 946 pence to close at a record 5,296 pence. BHP, based in Melbourne and led by Chief Executive Officer Marius Kloppers, said in a statement to the Regulatory News Service it recently wrote to Rio's board with the outline plan.

Unanimous Decision

``It significantly undervalues Rio Tinto and its prospects,'' Rio, which has a dual listing in London and Sydney, said in a separate statement. ``The boards have unanimously rejected the proposal as not being in the best interests of shareholders.''

The combination would raise antitrust issues, particularly in the iron-ore market, said Charles Bailey, an analyst at Brewin Dolphin Securities in London. BHP, Rio and Brazil's Cia. Vale do Rio Doce control about 80 percent of seaborne trade in the ore.

Rio, the world's second-largest iron-ore exporter after Vale, may now decide to combine with its Brazilian rival, according to Ian Henderson at JPMorgan Asset Management in London.

Vale Partner?

``I can't conceive a competing bid from another company coming through,'' Henderson, who manages $7 billion in natural- resource assets, said in a phone interview. ``Rio and Cia. Vale do Rio Doce may throw their arms around one another instead.''

Vale spokesman Fernando Thompson declined to comment.

BHP's offer sparked a rally in mining shares. The Standard & Poor's 500 Metals and Mining Index, which includes Freeport- McMoRan Copper & Gold Inc., rose as much as 3.5 percent. BHP was the only stock in the Bloomberg Europe Metals and Mining Index to decline today as Anglo American rose 15 percent and Xstrata Plc climbed 11 percent.

A five-year advance in metals prices has spurred more than 1,448 bids in the mining industry with a value of about $185.7 billion in the past year, according to Bloomberg data.

Escondida Mine

A combination of BHP and Rio would have a market value of about $380 billion and annual sales of about $54.6 billion, based on 2006 figures. Anglo American had revenue of $33.1 billion last year.

The merger's assets would include a stake in Chile's Escondida, the world's largest copper mine, and have operations in uranium, aluminum, diamonds, silver, lead and nickel.

BHP's assets include Olympic Dam, Australia's largest underground mine acquired as part of the A$9.2 billion purchase of WMC Resources Ltd. in 2005. BHP hasn't made a major acquisition since. The mine's resources include 79 million ounces of gold, making it the fifth-largest deposit in the world.

Rio, which reported a 43 percent increase in profit last year to $7.44 billion, will become the world's largest aluminum producer this year after agreeing to buy Montreal-based Alcan Inc. for $38.1 billion. The deal, priced at 1.72 times Alcan's revenue, will quadruple Rio's output of the light metal used in planes and car parts. BHP's offer would be worth more than seven times Rio's sales.

Shareholder Value

Acquisitions don't always work, according to an Aug. 15 report by Boston Consulting Group Inc. Mergers valued at more than $1 billion destroy twice as much shareholder value as smaller transactions, it said.

Andrew Pullar, a portfolio manager at Baker Steel Capital Management LLP in London whose $900 million in assets include BHP stock, expressed concern that the potential transaction needs approval from Rio.

``If it's going to be hostile, it's going to be a case of paying too much,'' he said.

Rio hired Morgan Stanley, Macquarie Group Ltd., Credit Suisse Group and NM Rothschild & Sons Ltd. BHP will use Goldman Sachs Group Inc. and Sydney-based Gresham Advisory Partners Ltd., said people briefed on the transaction.

To contact the reporter on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.net; Brett Foley in London bfoley8@bloomberg.net

Last Updated: November 8, 2007 13:02 EST