Rio Tinto Makes Bid for Alcan

A while back, American aluminum producer Alcoa made a $33 billion hostile bid for its Canadian counterpart Alcan. Yesterday, London-based Rio Tinto made a recommended bid worth $38.1 billion, about $101 per share. Throw in the debt that Rio Tinto will assume, and the transaction is around $44 billion. This is a significant premium, about 65%, above Alcan’s May trading high of $89.60. Yet, this is a good deal not only for Alcan shareholders but Rio Tinto’s as well.

The underlying fact is demand for bauxite, alumina and aluminum is soaring. China’s booming economy and its move into automobile-for-export production accounts for much of this increased demand. In fact, some estimates have aluminum consumption growing at 6% compounded for the next four years. Moreover, the price for aluminum is rising faster than that for copper, iron and other base metals. Whoever produces aluminum into the next decade will be doing so at a profit. Rio Tinto believes the deal will be earnings and cash-flow accretive from the first year.

According to the Financial Times, “The combined aluminium [British for aluminum] product group would be named Rio Tinto Alcan and would be a subsidiary of the larger Rio Tinto group. It will be the largest producer of bauxite, alumina and aluminium. Dick Evans, the current Alcan chief executive, would run the newly formed group which would be based in Montreal.”

However, Alcan will undergo some changes according to the FT. “In addition to the acquisition Rio Tinto also launched a review of its operations which is expected to lead to the sale of Alcan’s packaging business and other non-core operations. Guy Elliot, chief financial officer of Rio Tinto, said he expected these disposals to generate proceeds in the ‘double-digit billions.’ Alcan’s packaging division would be the first business to be sold. Last year it had sales of $6bn and accounted for a quarter of Alcan’s turnover.”

Meanwhile, Alcoa’s bid may be sweetened. Alcan rejected the $33 billion hostile bid as “inadequate,” and it will have to overcome a $1.05 billion break fee to which Alcan and Rio Tinto have agreed. Nevertheless, Alcoa would be at a significant disadvantage were the Rio Tinto deal to go through. The question is whether it can afford to buy Alcan or whether it can afford not to buy it.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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