Dunno about tomorrow blokes but here's a bit of light reading to...

Dunno about tomorrow blokes but here's a bit of light reading to chew on:


Alcoa hits Alcan with hostile bid

$33 billion (U.S.) offered for Montreal aluminum giant; U.S. company insists new Canadian jobs would follow takeover.

May 08, 2007 04:30 AM
Lisa Wright
business reporter

Saying the move will be good for Canada and Quebec, New York-based Alcoa Inc. surprised the markets yesterday by taking a $33 billion (U.S.) hostile run at Montreal aluminum giant Alcan Inc., one of the last major players left on Canada's resource landscape.

It was another wild day in the merger-crazy metals sector that included speculation from investment banks that the world's biggest miner, BHP Billiton Ltd., could take out its rival Rio Tinto PLC of London, which sent the shares of both companies soaring.

And the proposed Alcoa-Alcan deal – which would be the largest corporate takeover in Canadian history – was credited with sending the dollar to an 11-month high by bolstering optimism that a strengthening economy will prompt even more corporate takeovers.

"We understand the importance of Alcan in Quebec and Canada," Alcoa chief executive Alain Belda told reporters yesterday at a news conference at Montreal's Omni Hotel.

"And we understand how important Alcan is to the economic, social and cultural fabric of Quebec," he said, adding the takeover will create jobs in Canada.

The transaction, worth $36.36 billion (Canadian), would create the world's largest aluminum maker at a time when metals prices are soaring. Aluminum is used to make everything from pop cans and cars to airplanes and heavy machinery parts.

The unsolicited bid follows last year's hostile takeovers of two of Canada's iconic nickel and copper producers, Inco Ltd. and Falconbridge Ltd., by Brazil's CVRD and Switzerland's Xstrata PLC in the midst of one of the hottest markets ever for resources.

Two years of secret negotiations between Alcoa and Alcan went off the rails at the board level last November after the two rivals failed to come to a friendly agreement.

Alcan responded in a statement yesterday that it will advise shareholders after fully reviewing the offer. Shares soared 34 per cent yesterday on the Toronto Stock Exchange, suggesting investors are betting on a bidding war.

Asked whether Alcoa was expecting a dogfight, Belda said, "We're always prepared."

The deal is expected to result in annual savings of $1 billion (U.S.) within three years. Although the current offer expires July 10, Belda estimated it would more likely be completed by year's end, hinting he's not expecting smooth sailing.

Given the size of the two North American companies, a deal is expected to draw serious scrutiny from regulators, and Alcoa said it was prepared to sell off assets to win approval.

"Alcoa is clearly coming out of the chute thinking this is going to be a political football," said analyst Barry Allan of Research Capital Corp. in Toronto.

"It's early days yet, so Alcan could throw up some roadblocks. They have a lot of latitude because I think Quebec would, at the end of the day, insert itself in the process unless Alcan agrees to a deal."

Belda said he had "very constructive" preliminary talks this week with Quebec's provincial government, along with federal and municipal officials, but not in any great detail. He cited the two companies' aerospace businesses as a potential red flag.

Analysts said one of the keys to the takeover is approval from the Quebec government to keep in place a deal that gives Alcan's new Canadian plants access to cheaply produced power from hydro electric generation in the province.

"It will be very interesting to see how that works out because if you lose that competitive advantage then suddenly the deal doesn't work," said Gavin Graham, chief investment officer at Guardian Group of Funds.

Alcoa's cash and stock offer is $58.60 (U.S.) in cash and 0.4108 of a share of Alcoa for each share of Alcan. The proposed deal values Alcan's 367.6 million shares at $27 billion, but Alcoa said assumed debt raises the value of the deal to $33 billion.

The bid represents a 20 per cent premium to Alcan's all-time-high closing price last Friday and includes major commitments to Canadian operations in Quebec and B.C., including the largest private sector investment program in Quebec history worth about $4.5 billion (U.S.)

"The objective is to achieve a great company that will be even more important in the world" than the two are separately, Belda said.

"Bigger is better in this business because of the type of risk we have to take on to work in politically and economically risky areas. As my father used to say, you have to be bigger than the hole you can fall in," he joked, adding he doesn't foresee another company gobbling up Alcoa after the planned takeover.

The offer is subject to review by antitrust authorities in Canada, the U.S., Europe, Australia and Brazil, as well as foreign investment clearance in Canada, France and Australia.

Competition regulators held up the original plans of a friendly merger between the former Inco and Falconbridge earlier last year, allowing a bidding war that resulted in the two Toronto-based miners falling into foreign hands last fall.

Canada's Competition Bureau said it will review the proposed Alcoa-Alcan combination but didn't elaborate, noting it takes an average eight weeks.

Some analysts are skeptical the deal's approval will be a cakewalk in Quebec but say the fact that metals are so hot makes even tricky acquisitions appealing to the big players.

"The mining industry is in mega-merger mode. If they can enjoy this price cycle for the next two or three years then the thinking is that it's worth the effort," said Allan.

Dominion Bond Rating Service said yesterday Alcoa's credit rating is under review with negative implications due to the debt the U.S. miner must take on to finance the massive deal.

But Belda touted the new company as a top five miner globally that would have dual head offices in Montreal and New York with strategic management functions in each city.

He vowed the merger would "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."

"We firmly believe that a combination of the two companies will enhance our future competitiveness against increasingly formidable competitors from around the world," Belda said, referring to Russia, China and the Middle East.

Alcoa created Alcan in 1902 then split it off as a separate company in 1928, retaining largely common ownership until 1951. Major shareholdings were divested by court order.

Alcan shares rose $23.02 (Canadian) to close at $90.57 on the Toronto Stock Exchange. Alcoa shares closed at $38.63 (U.S.), up $2.97, in New York.