Mining rivals circling Alcan

Alcoa Inc.'s $27-billion (U.S.) bid for Alcan Inc. is the opening salvo in a potential global bidding war for the aluminum producer that sources said will draw mining giants such as Xstrata PLC, BHP Billiton Ltd. and Rio Tinto PLC into a contest for the Canadian industrial stalwart.

After two years of talks about a friendly merger broke off last fall, Pittsburgh-based Alcoa yesterday decided to appeal directly to Alcan shareholders with a bid of $73.25 a share in cash and stock, a 20-per-cent premium to Alcan's closing share price Friday in New York. Shareholders immediately sent the stock well above the offer price, to $82.11 by yesterday's end, in anticipation of a higher bid.

They may get one. Sources close to the discussions said Alcoa is only one of a number of interested suitors who are vying to acquire the Montreal company, the 10th-largest member of the benchmark TSX composite index.

The fight for Alcan comes after chief executive officer Dick Evans for months resisted overtures from Alcoa behind the scenes, and publicly cast himself and his company in the role of acquirer.

Yet, since 2003's acquisition of French producer Pechiney SA, the company hasn't made a big purchase while other metals companies around the world exploded in size.

When a merger last year made UC Rusal by far the world's biggest aluminum producer, the pressure increased on Alcoa and Alcan, now Nos. 2 and 3, to do something to regain global scale. But investment bankers and analysts said it will be difficult for the two to avoid being swallowed by multimetal giants that have eclipsed them in size.

Xstrata, winner of the Falconbridge Ltd. takeover battle, is likely to pursue a bid to add aluminum to its stable, said a person familiar with the company's plans.

Rio Tinto is also interested, investment banking sources said.

Another likely serious bidder is Companhia Vale do Rio Doce of Brazil, which recently bought Inco.

One person close to CVRD said the mining colossus is still on the prowl for acquisitions and its chief executive officer Roger Agnelli favours Canadian expansion. The Brazilian executive met several months ago with Prime Minister Stephen Harper and it is understood that he spoke enthusiastically about CVRD's plans to continue growing in Canada.

Sources would not confirm whether CVRD has already discussed a merger with Alcan, but they said the company's management was poised to move quickly.

BHP Billiton has been discussing a possible takeover of Alcan for months, say sources working with the Canadian company, and recently the British-Australian company's officials grew "frustrated" with Alcan's continuing resistance to a takeover. Now that the bidding has gone hostile, BHP may make a play.

"All the potential buyers are printing cash from copper, nickel, and iron ore, so they can pay whatever they want to add major diversification," said one investment banker who expects more takeovers will be pitched at both Alcoa and Alcan. "The majors have more cash than they know what to do with, and cannot afford to pass on a major asset," he said.

With those rivals lurking, Alcoa is betting that it can squeak a merger past competition authorities and has set July 10 as a deadline for shareholders to accept.

But competition regulators have a history of holding up deals in the aluminum business. When Alcan bought Pechiney of France, the deal took almost 200 days to close. When Alcoa bought Reynolds Metals Co., the acquisition took almost 300 days.

That could set up a replay of the Inco-Falconbridge merger story, where concerns about competition held up regulatory approval for months and opened the door to rival bids. A year after the two Canadian nickel giants announced their plans to merge, both were gone, each to a separate buyer.

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From friendly to frosty

June, 2005 Alcoa CEO Alain Belda and Travis Engen, then Alcan CEO, begin meeting to talk about a merger.