LONDON (MarketWatch) -- Russia's two biggest aluminum companies and Switzerland's Glencore agreed Monday to a deal that will create the world's biggest aluminum producer and pose what analysts say will be a challenge to Alcoa Inc. and Alcan Inc.
The new company, called United Company Rusal has the advantage of easy access to cheap Siberian electricity that gives it lower costs. The new company will also control a larger share of the alumina market, a key ingredient of aluminum.
The new company puts together Russian Aluminum, Sual Group and the alumina assets of Glencore International.
The deal also represents the latest consolidation move for Oleg Deripaska, the Russian oligarch who brought many one-time Soviet aluminum assets into Russian Aluminum in the so-called aluminum wars of the 1990s.
But the new giant will also face some big challenges ahead. Russia is reforming its electricity sector, and the company could see energy costs rise as it does so.
United Company Rusal will also be confronted by closer scrutiny of its operations if it meets its pledge to list shares in London within three years of the deal's completion. Rusal, as Russian Aluminum is known, has to date released only the barest of information.
The company's close ties to the Russian government, which sanctioned the merger announced Monday, could also be strained when President Vladimir Putin's term ends in March 2008.
Might Is Right
The deal agreed Monday - most details had emerged unofficially in recent weeks - creates a company with about 4 million tons of annual output, above Alcoa's roughly 3.8 million tons and Alcan's 3.42 million tons.
With an output of 11 million tons of alumina, United Company Rusal will also have a bigger grip on the market for alumina, a key component of aluminum. Aluminum is smelted from alumina which is refined out of bauxite ore. The metal is used in cars, cans, packaging and many other goods.
"I think this is quite a threat to Alcoa and to a lesser extent Alcan, because Alcoa loses their global leadership position," said Graham Birch, head of natural resources at investment management firm Blackrock. "Rusal and Sual have got some advantages as a combined entity that Alcoa would struggle to match."
In a share for share deal EN+, a holding company owned by Basic Element, will own 66% of the new company on behalf of Rusal, while Sual's shareholders will own 22% and Glencore's 12% respectively.
The deal creates a company worth an estimated value of $27.5 billion, said one person familiar with the deal.
"The combination of Rusal, Sual and Glencore's alumina assets transforms the new group into a truly global company," Deripaska said in a press release. "The transactions have a compelling industrial logic and deliver significant synergies for further growth."
"The synergistic effect will be $3 billion over the next five years, which includes improving cost efficiency," said Alexander Bulygin, Rusal's chief executive officer, who will take that position on the new company.
Sual President Brian Gilbertson, a mining industry executive credited with putting together the merger that created the world's biggest mining company, BHP Billiton PLC (BHP), will become the non-executive chairman of United Company Rusal.
Gilbertson's focus will be corporate governance and helping the company's development as a global metals and energy corporation. United Company Rusal will "continue to pursue opportunities around the world that fit closely with our strategy of creating a diversified energy and metals company," said a website the companies have put together to promote the deal.
United Company Rusal will shift the center of global aluminum production to Russia as the country's foreign relations are becoming more strained.
Russia's image has been tarnished by recent killings of high profile figures, including a top central banker last month and
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