After 2 years of talking, Alcoa launches US$27B hostile bid for Alcan

As Alcoa announced its US$27 billion bid for Alcan Monday, speculation had already risen as to the possible competition for the Montreal-based aluminum company.

Would-be suitors include BHP Billiton, Rio Tinto. AngloAmerican, CVRD of Brazil, Norway's Norsk Hydro and Russia's RUSAL. Alcan could also find a potential white knight to counter Alcoa's hostile bid. The Canadian Competition Bureau told Reuters Monday that it plans to do a "rapid review" of the Alcoa offer.

The combination of the two North American aluminum companies would create the fifth largest metals and mining company is the world, Alcoa Aluminum Chairman and CEO Alain J.P. Belda told Canadian reporters Monday during a press conference. In a news release, Belda said, "The combination of Alcoa and Alcan will significantly deepen an already extensive commitment by both companies to Canada, and it will ensure that Canada remains a world leader in the mining and metals industry."

Alcoa anticipates that the combination will generate pre-tax cost synergies of US$1 billion annually once fully implemented in the third year following closing. Belda forecast that the closure of the hostile bid, which followed two years of private discussions between the two companies, would probably occur at the end of this year.

In a news release Monday, Alcan said it had received notice of the hostile bid to acquire all outstanding shares of Alcan for $58.60 in cash and 0.4108 of a share of Alcoa common stock for each outstanding common share of Alcan. Key synergies being sought by Alcoa include: operational improvements in smelting and refining; overhead improvements such as sales and general administrative expense and plants costs and procurement. Based on 2006 production figures, the combined company's alumina capacity would have been 21.5 million tonnes and its aluminum capacity would be 7.8 million tonnes.

The combination would yield 12 mines, 13 refineries and 46 smelters on six continents with access to long-term, low cost energy compromising 34% self-generated power, 54% under long-term contract, and 54% coming from renewable hydro.

Alcan offers a network of low-cost aluminum smelters which are supplied by hydro-based power from the province of Quebec. Provincial Industry Minister Raymond Bachand said Monday that he would soon make public agreements Quebec has with Alcan regarding preferential power rates, and water rights it has for power generation. Analysts fear that those deals could evaporate if Alcoa assumes control of Alcan.

Meanwhile, BC Hydro has not yet commented on what impact Alcoa's hostile bid would have on their talks with Alcan on a new power deal for the smelter in Kitmat, British Columbia.

The merged company would have 188,000 employees in 67 countries, including a management team comprised of executives from both Alcoa and Alcan. As proof, Belda pointed to top managers who have emerged from Alcoa mergers with other companies including Alumax, Reynolds, and a Norwegian partnership.

In a May 7, 2007, letter to Alcan President and CEO Richard B. Evans, Belda wrote, "I would have preferred to pursue a negotiated transaction, and continue to feel strongly about the merits of a combination." Since two years of private conversations between the two aluminum producers failed to yield the desired result, Belda said Alcoa's board "authorized me to take our offer directly to your shareholders."

During a presentation to analysts Monday, Belda said the combination of the two companies would result in "significant scale to compete in a changing environment," optimize the companies' portfolio of upstream assets, and enhance their capacity for growth. The combined companies would generate an annual revenue of $54 billion, according to Alcoa, and create the top industry leader in bauxite mining and refining and smelting.

Among the factors influencing Alcoa's decision was the projected doubling of aluminum consumption over the next 15