Alcan bid faces rough ride

Alcoa Inc.'s US$33-billion hostile bid to buy Canada's Alcan Inc., potentially the biggest takeover in Canadian history, is already facing strong opposition from shareholders and could also meet potentially fatal regulatory and political hurdles.

"The politicians are going to make a political issue out of this," said Ron Mayers, head of alternative strategies at Montreal- based Desjardins Securities. "The result is that it's going to get a long and hard look, not only by the antitrust authorities who will have serious problems with this transaction because of the overlaps, but also by Investment Canada, who's got to determine net value to Canada."

Investors effectively rejectedAlcoa's advance yesterday by pushing Alcan shares up 34% to close at $90.57 (US$82.11), well above Alcoa's offer price of US$73.25 a share in cash and stock.

Pittsburgh-based Alcoa and Alcan held intense merger talks for almost two years before yesterday's announcement. According to a regulatory filing from Alcoa, the two companies were close to reaching a "merger of equals" before talks abruptly fell apart late last year.

The consensus on Bay Street and Wall Street is that Alcoa will come back to the table with a higher bid for Alcan, or a global mining giant like BHP Billiton PLC or Brazil's Companhia Vale do Rio Doce (CVRD) will step in with a counter-offer. CVRD was rumoured to be contemplating a takeover of Alcan just two months ago.

"I wouldn't discount anyone at this stage in the game because there's been so much [merger and acquisition] activity," said Stephen Carlin, vice-president of Canadian equities at KBSH Capital Management Inc.

If the Alcoa bid succeeds, it would create the dominant player in the global aluminum industry with about 7.8 million tonnes of aluminum-smelting capacity and annual revenue of US$54- billion. The offer comes at a time of record-high prices for aluminum and other metals that have set off a wave of consolidation around the world.

Alcoa chief executive Alain Belda tried to sell investors on the combination yesterday, saying there is "strategic logic" in combining North America's two largest aluminum producers to create a company capable of dealing with "the realities of our competitive marketplace and globalization."

He also revealed that Alcoa held talks to create a "merger of equals" with Alcan for nearly two years without success. Former Alcan chief executive Travis Engen had sent a letter to Mr. Belda in August, 2005, saying a merger with Alcoa would subject Alcan to "significant value destruction risks."

In October of that year, Mr. Belda sent Mr. Engen and the Alcan board a letter proposing to buy out Alcan for US$22 in cash and 0.94 of an Alcoa share for each Alcan share. Mr. Engen sent a letter back saying the board rejected the proposal.

But the talks picked up steam again after current Alcan CEO Dick Evans took over in early 2006. He first met with Mr. Belda in May to discuss the transaction, and received approval from Alcan's board in August to explore a potential deal. Mr. Evans stated that he wanted to pursue the deal on the condition that it be a "merger of equals" between the two companies so that it was not a pure takeover of Alcan, according to the filing.

In September, Mr. Evans conveyed to Mr. Belda that talks were proceeding "too fast," and the talks broke down in December after the two sides could not come to terms on a "standstill" agreement, which would limit Alcoa from buying Alcan's shares for a specified period of time.

The Alcoa offer comes as Canadian companies -- particularly in the resource sector --are getting bought up by foreigners at a record pace. Last year, a record 1,968 companies were taken over in transactions worth $257-billion, according to the investment bank Crosbie & Co. Takeover fever continued this year as many income trusts were snapped up in the wake of th