BHP Billiton is heading for a clash with regulators over the miner's $170 billion plan to buy rival Rio Tinto which gives it control of one third of the world's traded iron ore.
Battle lines are being drawn in Western Australia's Pilbara region, the world's biggest source of high-grade ore, where BHP is likely to be forced to give up key assets. European regulators look likely to be the most tenacious.
I think it will be a very big issue with the EU. I would be extremely surprised if there wasn't a divestment required, said London analyst John Meyer of investment bank Fairfax.
At the end of the day, the EU is not going to want to see so much Australian iron ore concentrated in single hands.
Iron ore is key to both groups as a lucrative money-spinner with low costs -- Rio's business had an EBITDA margin of nearly 60 percent last year compared to 41 percent for the whole firm.
Any offer to sell interests in Brazil or Canada is unlikely to satisfy regulators since Australia is where a merger would concentrate assets. The two firms already account for 80 percent of output from Australia's key Pilbara region.
If you want to restore some sort of competitiveness you need to impose some kind of divestment in the Pilbara area, said analyst Luc Pez of Oddo Securities in Paris.
Australia accounts for nearly a fifth of global iron ore output and is the top source of high grade ore.
It's probably a combination of outright divestment of certain things they don't think have a long-term optionality and then bringing in partners for some of the new projects down the line, probably the Chinese, said an analyst in Johannesburg who declined to be named.
Waiting in the wings to snatch any disposals would be Anglo American, which is expanding its iron ore unit, and Xstrata, which has been looking to enter the sector, analysts said.
BHP -- already the world's biggest mining group -- and Rio would jointly control about 36 percent of the seaborne trade in iron ore, important since this trade sets prices used in annual contract talks with steelmakers.
The link-up would effectively create a duopoly between the new group and Brazil's Vale, the global leader.
BHP calculates the market share differently -- which will certainly be an early skirmish -- arguing it has only 25 percent of the wider contestable iron ore market that includes domestic iron ore consumed internally.
BHP also argues that a merger of the world's second and third biggest iron ore producers would help consumers by speeding up expansion of iron projects and boosting output, possibly helping to relieve upward pressure on prices.
Iron ore is due to be the regulators' main focus but uranium, copper concentrate and coking coal will also be under scrutiny in talks that span Canada to Korea.
BHP will seek to twin any divestments on competition grounds with a strategy to create a more focussed, easier-to-manage group and will want to sell mines with limited growth options, analysts said.
There's a separate issue (besides anti-trust) in terms of what BHP would like to sell, partly for reasons of focus and partly maybe to finance the deal, said analyst Tom Gidley-Kitchin at Charles Stanley in London.
If you take the view that it's a sellers market, BHP ought to be able to get some good prices for these businesses of Rio that it chooses to sell.
Europe will be the main battleground as its regulators have a daunting reputation. The European Commission has been fighting running battles with U.S. software giant Microsoft, which got a record 899 million euro fine in February for using high prices to discourage software competition.
European steelmakers -- founding members of the original European Union -- have vowed to fight vigorously against the deal. They will certainly point to iron ore price hikes, including this week's price rise agreements of up to 96.5 percent as evidence that the market is already too concentrated.
I would not rule out the risk of a veto from the EU, which I think has been downplayed too much by BHP management, Oddo's Pez said.
But BHP also looks set for battles with regulators in Asia, lawyers said.
The great unpredictable is which of the other regulators (besides the EU) may throw a spanner in the works, it won't necessarily be anticipated, said Jonathan Scott, partner in law firm Herbert Smith. (See factbox)
COPPER CONCENTRATES, URANIUM
Although the combined firm would only have around 12 percent of the total copper market, its share of third-party sales in copper concentrates would be 24 percent, according to ING analyst Nick Hatch.
In 2003, regulators in the United States, Europe and Canada launched raids on BHP, Rio and other firms to gather information on whether there was a cartel in the copper concentrate market.
In 2005, the case was closed with no adverse findings, but we would expect another review, Hatch said in a research note.
Uranium could be a touchy area also as nuclear power enjoys a comeback in popularity and governments become increasingly concerned about nuclear proliferation.
The two firms would have around a quarter of the world market in uranium oxide concentrate, the material shipped from mines before it is enriched and can be used as nuclear fuel.
BHP Billiton might be happy to sell Rio's Rossing uranium mine in Namibia to concentrate on its huge Olympic Dam project in Australia, which has the world's largest uranium deposit.
That's typical BHP Billiton style -- move away from the smaller assets, go for the really big stuff, low-cost, scale, expandability, the Johannesburg analyst said. (Additional reporting by David Lawsky in Brussels, Lucy Hornby in Beijing, Tom Miles in Hong Kong, Yuko Inoue in Tokyo; Editing by Louise Ireland)