Alcan introduces white knight (July 12, 2007)

Rio Tinto (RTP-N, RIO-L, RIO-A) has entered the lists as a friendly bidder for Alcan (AL-T, AL-N), in a deal that values the Montreal-based aluminum producer at $40 billion.

Rio is offering $105.74 (US$101) per share for Alcan shares, against Alcoa (AA-N), which made a takeover offer of US$58.60 plus 0.4108 of a share for Alcan shares on May 7. Three directors from Alcan would be named to the Rio Tinto board and Rio’s aluminum operations, titled Rio Tinto Alcan, would be consolidated in Montreal.

The new company would be the largest aluminum producer in the world, and the combined operations would be low-cost. Alcan would sell off its packaging division, making Rio Alcan purely a metal and alumina producer. Rio also plans to shear off some of its business units to create a more streamlined organization. Rio has said it would apply for a Toronto Stock Exchange listing.

The bid jumps Alcoa’s bid by about 33%, based on closing prices on July 11, which put the value of the Alcoa bid at US$76.03. Rio’s bid is supported by Alcan’s board, which has been seeking a deal with one of the large base-metal companies since negotiations for a friendly deal with Alcoa broke off earlier this year.

There is a break fee of just over US$1 billion, payable by Alcan if it kills the deal, and a break fee payable if Rio breaks the deal of 1% of Rio’s market capitalization, or US$1 billion, whichever is less. There is another reimbursement of US$200 million payable in other circumstances.

The bid is conditional on Rio seeing two-thirds of Alcan’s shares tendered to the bid, and will need the usual approvals from competition and securities regulators. Rio plans to pay for Alcan out of cash plus a loan facility underwritten by four major European banks.

Rio Tinto shares were down 1.83 at 38.10 on the London exchange, and its American Depository Shares were down US$14.32 at US$310.10. Alcan shares rose $8.35 to $102.75 on Toronto.

The deal, widely expected to kill Alcoa’s bid for Alcan, fuelled speculation that Alcoa will be the next takeover target in the aluminum industry. Alcoa shares were US$2.86 higher at US$45.29.