Alcoa Takes Alcan Bid To The Street

Alcoa's long-running negotiations to buy its smaller Canadian rival Alcan were going nowhere, so the American aluminum maker announced an end-run Monday with a $32 billion hostile bid. However, Alcan's shareholders might prove just as difficult to woo as the 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. They offer is worth $74 per Alcan share, based on Alcoa's Monday price. Including Alcan's $4.2 billion of outstanding debt, the offer is worth 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 morning trading, shares were up $21.26, or 34.8%, to $82.46.

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. (See: "Alcoa Can Wait".)

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 bested Xstrata's bid for the Canadian nickel miner LionOre. (See: "New Suitor For LionOre".) 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.

Shares of Alcoa were up $1.82, or 5.1%, to $37.48, in morning trading.