Alcoa Tries New Course To Land Alcan

Alcoa's long-running negotiations to acquire Canadian rival Alcan weren't progressing, so the American aluminum maker switched course on Monday with a $33 billion hostile bid. Alcan's shareholders, however, might prove no more receptive to Alcoa than their company's board of directors.

Alcoa (nyse: AA - news - people ) offered $58.60 in cash and 0.4108 share of Alcoa stock for each outstanding common share of Alcan (nyse: AL - news - people ). The offer is worth slightly more than$74 per Alcan share, based on Alcoa's Monday afternoon price. Including Alcan's $5.2 billion of outstanding debt, the bid values the Canadian company at about $32.5 billion.

Alcoa said it was tired of talking. "This offer follows almost two years of discussions between our companies regarding a variety of potential business combination transactions, including unsuccessful board-level discussions of a merger transaction last fall" said Alcoa Chief Executive Alain Belda Monday. "We are very disappointed that those efforts did not result in a negotiated transaction – a conclusion we would have strongly preferred"

But winning over shareholders could prove just as difficult as convincing management. Alcoa will need support from two-thirds of Alcan's common shares for a successful deal. Alcan stock jumped well above the offer price Monday already indicating Alcan holders do not expect the current bid to go through. In afternoon trading, shares were up $19.96, or 32.7%, to $80.99.

Shares of Alcoa were up $2.24, or 6.3%, to $37.90, in early afternoon trading.

Even at the price offered by Alcoa, shareholders might still feel Alcan undervalued. The stock has long traded at a discount to its bigger rival. According to Revere Data, Alcan was trading at 10.1 times expected 2008 earnings on Monday while Alcoa was trading at 11.0 times earnings.

Alcan shareholders also have reason to believe the stock could be worth more because of the potential for a higher bid. Metal miners and producers have been buying each other up to benefit from economies of scale during a hot metals market. Last week, Norilsk Nickel (other-otc: NILSY - news - people ) bested an offer by Xstrata (other-otc: XSRAF - news - people ) for the Canadian nickel miner LionOre (other-otc: LMGGF - news - people ).  And Alcan has other potential suitors in BHP Billiton (nyse: BBL - news - people ) and Rio Tinto PLC (nyse: RTP - news - people ), which were both reported as eyeing it last year.

Another offer could prompt a bidding war. Scott Burns, an analyst at Morningstar, said the synergies from the potential merger--estimated by Alcoa to be approximately $1 billion--suggest that it would be willing to pay more. "We think that Alcoa has left itself room to further raise its bid before it begins to destroy value," wrote Burns in a client note.

Alcoa would regain the title of the world's largest aluminum producer with the acquisition of Alcan. It lost the top spot in October after Russian Aluminum bought the Sual Group.