Alcan-Quebec pact's not a problem for Alcoa

SAN FRANCISCO -- Alcoa Inc. said Friday that an agreement between Alcan Inc. and Quebec that guarantees the aluminum producer access to local hydroelectric power in exchange for keeping up employment levels in the Canadian province should not be an obstacle to buying Alcan.

"We believe our plans meet its conditions," said Alcoa in an e-mail to media after it received a copy of the agreement. It said it had already agreed to several of its commitments in its initial offer plan for Montreal-based Alcan.

Alcoa, which is headquartered in New York with offices in Pittsburgh, on Monday launched a hostile bid to buy rival Alcan for $27 billion, a cash-and-stock deal that would lock it in as the world's largest producer of aluminum and its raw component alumina. It must first convince Alcan shareholders and its board, which held unsuccessful talks with Alcoa management last fall. See story on bid.

A Times of London report has noted that the outcome could also hinge on the pact Alcan reached with Quebec.

That deal, inked in the wake of board talks between Alcoa and Alcan, ties Alcan's rights to access Quebec's rich hydroelectric power resources with its employment and investment in the province.

Saying "there exists from time to time the possibility that a person or group of persons ... would seek to acquire (directly or indirectly) control of Alcan," the accord spells out that any prospective buyer must show Alcan's board that such a deal wouldn't put Quebec's economy and society in jeopardy. That includes keeping "substantive operational, financial and strategic activities and headquarters" in the French-speaking province.
 
If a buyer completes a deal without first getting the sign-off from the Alcan board and Quebec, the government can cancel the power-supply contracts, says the continuity agreement.

"The maintenance of the integrity of these agreements is nonnegotiable," said M. Raymond Bachand, Quebec's minister for economic development, in a statement Thursday.

According to Alcan's 2006 annual report, the company's agreement with Quebec-owned power generator Hydro-Quebec guarantees its supply of up to 3 billion kilowatts of electrical energy a year, which it uses to run its smelters. In December, Alcan signed an additional long-term energy deal for the supply of 2 billion kilowatts a year, effective in 2010.

Alcan's cheap supply of electricity is attractive for Alcoa. Like other global metals producers, the suitor is trying to expand its access to supplies of cheaper power -- including geothermal energy in Iceland -- to keep up with overseas competitors that also have access to low-cost electricity.

In its offer plan laid out Monday, Alcoa also tried to anticipate any concerns about job losses in the province, where Alcan has operated for over a century.

The new company would have dual head offices in Montreal and New York. Montreal would become the combined company's global headquarters for primary products and for related research and development, Alcoa said.

Also, Alcoa expects to implement the two companies' planned investments in the province totaling about $5 billion. It would be the single-largest private-sector investment program in Quebec's history, Alcoa said.

Alcoa's shares, part of the Dow Jones Industrial Average, rose 1% to $38.01 in late afternoon trading, while Alcan's U.S.-listed shares rose 2% to $80.02.