May 8, 2007 6 min read

TORONTO (AP) – Alcoa Inc., seeking to keep pace with growing Russian rival Rusal, launched a hostile $27 billion bid for Canadian aluminum rival Alcan Inc. on Monday, after failing in almost two years of private talks to reach a negotiated deal. Alcan’s U.S. shares rose 33 percent, well above the offered price, suggesting investors think the bidding could go higher. Alcoa shares gained 8 percent.

Montreal-based Alcan said its board “will consider the proposal” and advised shareholders to await its recommendation.

Alcoa said the proposed cash-and-stock deal would create a premier diversified global aluminum company which could grow faster than the two companies could on their own.

“I know from almost two years of private discussions with Alcan that they also see the strategic logic behind this combination,” said Alain Belda, Alcoa’s chairman and CEO.

“I’m disappointed that we were not able to come to a negotiated transaction, and while I’m taking this offer to shareholders I hope that this combination can move forward with the support of Alcan management and board.”

Alcoa said in announcing the offer that the companies’ talks had reached the board level last fall. The company plans to begin its offer on Tuesday.

The combined company, with 188,000 employees in 67 countries, would have had revenue last year of $54 billion and earnings before interest, taxes, depreciation and amortization of $9.5 billion.

The combined company’s alumina capacity would be about 21.5 million metric tonnes, and its aluminum capacity would be approximately 7.8 million metric tonnes. Alumina is used to make aluminum. A metric tonne is about 2,204.6 pounds.

Until recently both companies were the world’s top two producers of aluminum, but they now lag behind Rusal of Moscow. Rusal, its rival Sual and Swiss-based commodities trader Glencore International AG completed the combination of their assets at the end of March, creating United Company Rusal and surpassing Alcoa as the world’s largest aluminum producer.

The Alcan deal would vault Alcoa past Rusal as in aluminum production.

“The reality is that commodities businesses are consolidating globally,” Morningstar analyst Scott Burns said. “When foreign countries like Russia allow their two largest aluminum producers to merge and really dominate that market, and you’ve got a company called Chalco in China where the Chinese government has made no secret that they want this to be a national champion, I think it really gives a company like Alcoa a nice leg to stand on in terms of regulatory objection.”

New York-based Alcoa, which plans to maintain dual headquarters in Montreal and New York, sees annual pretax cost savings of about $1 billion from its proposed combination with Alcan in the third year after the deal closes.

Belda said Alcoa has been in contact with three levels of government in Canada about the deal. He said the deal would “significantly deepen an already extensive commitment by both companies to Canada and it will ensure Canada remains a world leader in the mining and metals industry.”

Alcan has a big presence in the French-speaking province of Quebec and approval could be difficult because of nationalist sentiment there.

The transaction is subject to review by antitrust authorities in the United States, Canada, the European Union, Australia and Brazil, as well as foreign investment clearance in Canada, France and Australia.

Burns said Alcoa won’t have problems in the U.S. where there won’t be many job losses. He also said Alcoa “has really gone out of their way to assuage Canadian fears before they’ve even been risen.”

Alcan said in a statement its board “will consider the proposal and how it could impact the interests of Alcan’s shareholders and other stakeholders.”

Alcan recommended that shareholders wait until they see the Alcan board’s decision before tendering to the Alcoa bid.

Burns said a deal likely fell through last fall because Alcan was in the midst of their turnaround and wanted to see that to fruition.

“I think Alcan’s management first wanted to do their own turnaround so that they could really maximize shareholder value and not let Alcoa come in and sweep the company on the cheap,” said Burns, who noted the stock has increased in recent months.

At its annual meeting last month, Alcan CEO Dick Evans said the company will be put at a serious disadvantage by a controversial measure in Canada’s recently released federal budget that scraps a tax deduction for companies investing abroad. Evans warned the initiative could make Alcan more susceptible to a foreign takeover.

Alcan had been cited as a potential takeover target by Rio Tinto PLC of London and Companhia Vale do Rio Doce of Brazil.

“There’s been a lot speculation that some of the large mining conglomerates have been sniffing around Alcoa,” Burns said. “It’s very logical to think that if they were interested in Alcoa that they would be almost equally interested in Alcan. They are very similar. Part of me thinks this is pre-emptive bid to either forestall its own acquisition or to buy Alcan before somebody else could.”

Alcan could become the latest Canadian company to be taken over by foreign ownership. Last year, Canada’s Falconbridge Ltd. nickel producer was acquired by Swiss miner Xsrata PLC. And Lundin Mining Group of Sweden has made a bid for Rio Narcea Gold Mines Ltd. of Toronto.

Alcoa founded Alcan in 1902, split it off as a separate company in 1928, and retained largely common ownership until 1951 when major shareholdings were divested by U.S. court order because of antitrust issues.

Belda said they will allay fears by divesting certain assets. Those assets would likely be products for the aerospace industry, Burns said.

Belda said he’s confident the deal will be accepted.

Alcoa is offering a combination of cash and stock that it said was worth $73.25 for each Alcan share, a 20 percent premium to Alcan’s closing price Friday of $61.03 and a 32 percent premium to Alcan’s average closing price over the last 30 trading days.

With about 367 million shares outstanding, the offer values Alcan at nearly $27 billion. Alcoa said debt being assumed would boost the total value of the deal to $33 billion.

The bid includes $58.60 a share in cash and 0.4108 of an Alcoa share for each share of Alcan.

Alcan’s U.S. shares rose $20.02 to $81.05 in late trading – above the offered price – while Alcoa shares gained $2.85 to $38.51.

AP-ES-05-07-07 1601EDT