Alcoa said on Monday it would make a hostile bid for Canada’s Alcan for nearly $27 billion, after talks between the two aluminum producers failed to lead to a deal.
If successful, the bid would create the world’s largest producer of the metal, which is used in products ranging from beverage cans to airplanes.
The value of the bid in cash and Alcoa stock rose to $74,47 per Alcan share during the day from an initial $73,25 as Alcoa’s shares gained 8,3%. But expectations that a higher bid may surface drove Alcan’s shares well beyond the price and they ended up 34,5% at $82,11 in New York.
”The starting gun has just gone off,” said John Ing, analyst and president of Maison Placements Inc. ”As for possible suitors, it’s pretty well anybody nowadays. Nobody is immune from takeover … There’s so much liquidity around, that there are a lot of companies that would be interested.”
Most big metals and mining companies have been seen as possible buyers for Alcan, industry sources said. That list would include Anglo-Australian majors Rio Tinto and BHP Billiton, Anglo American, Brazil’s CVRD, Norway’s Norsk Hydro and Russia’s United Company Rusal, among others.
BHP in Melbourne declined to comment. Rio Tinto could not be immediately reached, though the company in the past has refused to comment on speculative issues.
”With the commodities markets so strong, only the foolish wouldn’t be looking to get bigger,” said BNP Paribas analyst David Thurtell.
Alcoa chief executive and chairperson Alain Belda said the planned link-up would better position the company to compete with fast-growing competitors. That group includes players such as Rusal and China’s Chalco, which saw its value nearly triple with its listing in Shanghai last week.
”Emerging global players in Russia, China, India and the Middle East are quickly expanding and adding capacity on a global basis,” Belda told a conference call.
Montreal-based Alcan, which was split off from Alcoa in the 1920s because of antitrust concerns, said it planned to consider the proposal and advised shareholders to wait until it has fully reviewed the offer.
”I just think that Alcan was perennially undervalued and it was inevitable something like this would happen,” said John Redstone, an analyst at Desjardins Securities.
An Alcoa-Alcan combination would control about 25% of the alumina raw material and primary aluminum markets and put its production capacity well above that of rival Rusal.
”The mentality in the marketplace right now dictates that if you don’t go after a company, someone else will,” said Rob Nachum, managing director of Adelaide-based mining research group Minalysis.
Alcoa said its move comes after nearly two years of talks between the companies ended in November without a merger agreement. It put the enterprise value of the deal at $33-billion, including $6-billion in debt.
”We are very disappointed that those efforts did not result in a negotiated transaction — a conclusion we would have strongly preferred,” said Belda, adding, ”therefore we are taking our offer directly to Alcan shareholders”.
Alcoa, which is the world’s largest aluminum seller in terms of revenues, said the combined company would see finished aluminum production capacity of 7,8-million tonnes compared with Rusal’s 4-million tonnes.
Its alumina capacity, the raw material used for the metal, would be 21,5-million tonnes versus Rusal’s 11-million.
The bid of $58,60 in cash and 0,4108 per share of Alcoa common stock represents a 32% premium to Alcan’s average closing price on the New York Stock Exchange over the last 30 trading days.
Alcoa shares rose $2,97, or 8,3%, to $38,63 in New York, a three-year high. In its offer document filed with regulators on Monday afternoon, Alcoa said it had lined up $30-billion of financing from Citigroup and Goldman Sachs for the bid. The bid would remain open until 5 PM Eastern Daylight Time on July 10.
Antitrust hurdles
Given the size of the two North American companies, a deal is expected to draw scrutiny from regulators, and Alcoa said it was prepared to sell off assets to win approval.
Belda told Alcan CEO Richard Evans he was confident they could resolve any regulatory concerns in a letter last year through ”targeted divestitures” and by working with regulators to address competitive concerns.
Belda said the company had already spoken to some regulators on a preliminary basis, and cited the two companies’ aerospace businesses as a potential issue.
Analysts said the takeover would probably require the approval from the Quebec government to keep in place a deal that gives Alcan access to low-cost electricity.
”It will be very interesting to see how that works out because if you lose that competitive advantage then suddenly the deal doesn’t work,” said, Gavin Graham, chief investment officer at Guardian Group of Funds.
In Quebec City on Monday, Economic Development Minister Raymond Bachand said he would divulge, possibly by Tuesday, details of Alcan’s agreements with the province on power rates, waterways rights and investment commitments.
Alcoa expects the deal, which it hopes to complete by the end of the year, would create annual cost savings of $1-billion, beginning in the third year after closing, and add to cash flow and earnings per share in the first year.
It said the new company would have dual head offices in New York and Montreal and would have had combined revenues of $54-billion on an aggregate basis in 2006. – Reuters 2007