BHP Billiton, the world’s largest mining company, is understood to have begun talks with private equity firms over a possible $40 billion (£20 billion) takeover of Alcoa.

Sources close to the company said that BHP’s favoured partner is Blackstone Group, which bought Hilton Hotels for $26 billion last week. BHP has appointed Merrill Lynch to investigate bids for Alcoa and Alcan, the North American aluminium producers.

Alcoa is understood to be BHP’s favoured target, but the Anglo-Australian miner is unwilling to pay a premium for assets that it does not want to retain. Alcoa has a large downstream operation that makes aluminium packaging, wheels and panels for cars and aircraft. This division includes the Reynolds and Baco aluminium foil brands.

BHP wants to concentrate on mining and refining and is looking for a private equity partner to spin off the packaging assets after acquisition.

Blackstone is believed to be a favoured candidate to partner BHP because one of its special advisers is Paul O’Neil, the former United States Treasury Secretary and a former Alcoa chief executive. Mr O’Neil ran the Pittsburgh-based company between 1987 and 1999 and was chairman in 2000 before moving to Washington. Neither BHP or Blackstone would comment.

Rumours of buyers for both Alcoa and Alcan are beginning to surface on Wall Street and in the City. Rio Tinto hired Deutsche Bank two months ago and CIBC recently to look at a possible $30 billion bid for Alcan.

CVRD, the Brazilian mining giant, is also understood to be watching the situation but is not thought to have appointed bankers to advise on a deal.

In addition, Alcoa is trying to secure a deal with Alcan. It has offered $73 a share, or $28 billion, for the Canadian company, but this figure has been rejected. Alain Belda, the chief executive of Alcoa, is expected to raise the offer to about $75, but with so many potential bidders waiting on the sidelines, shareholders are hoping for a bigger payday.

Alcoa’s bid for Alcan is widely regarded as a last-ditch move to prevent a takeover by rival resources groups.

Rio Tinto, led by Tom Albanese, its new chief executive, is expected to step in as a white knight bidder for Alcan. This would leave Alcoa vulnerable to BHP-Blackstone or CVRD.

BHP first raised the possibility of bidding for Alcoa this year, but the idea is thought to have been shelved in favour of returning money to shareholders. However, BHP also has a new chief executive – Marius Kloppers – who is understood to be pushing the Alcoa bid again.

Aluminium producers have become an attractive target as the metal’s price has soared 55 per cent in two years, from $1,800 to $2,812 per tonne yesterday.

Alcoa and Alcan are under pressure from emerging producers in Russia and China. The Moscow-based Rusal has overtaken Alcoa as the world’s largest aluminium producer and plans a London floatation in November that could raise more than $10 billion.

Chalco, the Chinese state company, is embarking on a huge capacity increase that could lift it past Alcoa and Alcan. Chalco is rumoured to be interested in making foreign acquisitions, but the Chinese company would find regulatory approval for an Alcoa or Alcan deal difficult to obtain and it is not expected to join the fray.

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