Alcoa Bids for Alcan

A meaty hostile offer has been tabled; now let the politics begin. On May 7, U.S. aluminum giant Alcoa (AA-N) unveiled a cash-and-share bid for Canada’s largest mining company, Alcan (AL-T, AL-N), in a move that will inevitably trigger many rounds of regulatory approvals and asset sales.

Alcoa is offering US$58.60 in cash and 0.4108 of a share for each Alcan share, representing a total bid of US$73.25 per Alcan share based on Alcoa’s closing price of US$35.66 on May 4, or about US$33 billion in enterprise value.

Alcoa stipulates that at least two-thirds of Alcan shares must be tendered, and adds that Alcoa shareholder approval won’t be sought. It hopes to close the deal by year’s end.

Alcoa CEO Alain Belda has revealed that his company had been in discussions with Alcan management over a possible merger for two years, but the two parties could not come to terms.

Before the opening bell on May 7, the offer represented a 32% premium to Alcan’s average closing price in New York over the last 30 days and a 20% premium to Alcan’s closing price on May 4.

Alcoa readily admits it will likely have to divest some assets in order to gain regulatory approval for the takeover from competition authorities in jurisdictions that include the U.S., Canada, the European Union, Australia and Brazil. The deal also needs foreign-investment clearance in Canada, France and Australia.

On paper, at least, the combined companies would employ 188,000 people in 67 countries, and would have had revenues last year of US$54 billion and top-line earnings of US$9.5 billion. The combined alumina production capacity last year would have been 21.5 million tonnes, and the primary aluminum capacity would have been 7.8 million tonnes.

The combined market capitalization of the new company would be around US$74 billion, making it the world’s fifth-largest mining company after BHP Billiton (BHP-N, BLT-L), Companhia Vale do Rio Doce (RIO-N), Anglo American (AAUKF-O, AAL-L) and Rio Tinto (RTP-N, RIO-L).

If it succeeds with its bid, Alcoa says that after three years, it will be able to realize annual savings of US$1 billion from cost synergies alone, generated not so much from job cuts but rather from “operational improvements in the areas of smelting, refining and R&D, procurement and packaging, and overhead improvements.”

Alcoa states that it hasn’t settled on a name for the new company yet, but that it would have a dual head office in New York City and Montreal, in a melding of both companies’ existing head offices.

Alcoa notes that it has brought into the fold existing management from past takeover targets, and anticipates a similar pattern with many of Alcan’s current managers. Plans are in place to add five Canadians to Alcoa’s existing 10-member board.

Alcoa envisions Montreal becoming the combined company’s global headquarters for primary products (i.e. bauxite, energy, alumina and aluminum) and related research and development, with Alcoa relocating much of its primary metals research activities to la belle province.

Alcoa reckons that as a standalone company, this primary products business would be the largest aluminum company in the world, with US$32 billion in 2006 revenues and 38,000 employees in 29 countries, ranking among Canada’s largest businesses.

With Alcan being one of Canada’s and Quebec’s prized companies, Alcoa is taking great care to emphasize that it is indeed ready to step up investment here, particularly in Quebec, where power-hungry Alcan has intimate connections with Hydro-Quebec, the government-owned and politically sensitive hydroelectric power giant.

Alcoa already employs more than 5,000 people in Canada, and generated more than US$3 billion of its total revenues last year through its operations in this country.

(Indeed, Alcoa has been active in Canada since the turn of the last century, having produced its first aluminum in Quebec in 1902. Most of Alcoa’s non-U.S. assets — including Alcan — were spun off in 1928.)

The combined company would generate some US$8.5 billion in annual revenue from the Canadian operations, and would employ 16,000 people in the country, including 13,000 in Quebec.

Alcoa would also seek to list on the Toronto Stock Exchange.

Going forward, Alcoa says it expects to wrap up negotiations with the Quebec government that will allow the company to set in motion planned expansion and modernization investments of US$5 billion in the Saguenay-Lac-Saint-Jean, Baie Comeau and Deschambault regions, making it the single largest private-sector investment in the province’s history.

Meanwhile, in British Columbia, Alcoa says it’s committed to working with the provincial government, local communities and First Nations to move forward with Alcan’s planned, but controversial, US$1.8-billion modernization of the Kitimat smelter.

Even without these expansions, Canada currently ranks as the world’s third-largest aluminum producer, behind China and Russia.

At presstime, Alcan was recommending shareholders defer making a decision on the bid until its board has more thoroughly reviewed the offer.

If successful, Alcoa’s audacious bid would cap off an extraordinary past 10 years of consolidation in the North American and European aluminum subsector. Between 1998 and 2002, Alcoa swallowed five major competitors: Alumax, Reynolds, Cordant, Fairchild and Ivex. Alcan was busy then, too, gobbling up Algroup and Pechiney in 2000 and 2004, respectively.