Australia's Alumina To Benefit From Alcoa, Alcan Deal

Australia's Alumina Ltd. (AWC.AU) Tuesday said it stands to benefit if its joint venture partner, U.S.-based Alcoa Inc. (AA), is successful in a US$26.9 billion bid to acquire rival Alcan Inc. (AL).

Analysts also said Alcoa's move to create a giant player in the ever-consolidating aluminum industry, boosts valuation metrics across the sector.

"Surely this must be positive," analysts at Macquarie Research Equities said in a note to clients.

"In a vanilla sense, MRE can't help but think that the market will wake up this morning and consider bauxite, alumina and aluminium assets to be more valuable than they were yesterday given the 30% premium that Alcoa is proposing to pay for Alcan," the report said.

Alcoa's cash-and-stock bid valued each share of Alcan at US$73.25, a 20% premium to Alcan's record closing high on Friday. Shares in Alcan rallied Monday as observers said competing offers for the Canada-based company are likely in the works.

Alumina shares closed Tuesday up 3.4% at A$7.58.

Alumina and Alcoa operate Alcoa World Alumina & Chemicals, a global joint venture that is 40% owned by Alumina and 60% by Alcoa.

In a statement, Alumina said the transaction has the potential to "deliver significant benefits" to AWAC, as Alcoa would have to sell some of Alcan's assets into the joint venture.

"In particular, the AWAC agreements provide for AWAC to be the exclusive vehicle for the pursuit of Alcoa and Alumina's interests in bauxite and alumina businesses," it said.

But analysts noted the likelihood of a competitive battle for Alcan would delay any possible takeover tilt for Alumina. Mining analysts have long tipped cashed up mining heavyweights BHP Billiton Ltd. or Rio Tinto Ltd as potential bidders for AWAC. Rio Tinto and BHP are also considered likely suitors for Alcan or Alcoa.

"It is reasonable to conclude that Alumina itself is now less of a target in the near term," Macquarie said.

Another concern raised by analysts is that a successful bid may require Alumina to make a significant capital raising to fund the purchase of Alcan's assets into AWAC.

Credit Suisse analysts Peter O'Connor and Pablo Kohen estimate Alumina would have to provide US$1.78 billion to US$2.14 billion to fund its share - approximately 30% of Alumina's current market capitalization.

However, they expect that shareholders would support an equity raising for such a company transforming acquisition.

Ratings agency Standard & Poor's placed Alumina on negative watch in light of the potential for some of Alcan's assets to be offered into the joint venture.

"Alumina's share of funding for these new AWAC assets could be significant and may stress the company's capital structure," Standard & Poor's credit analyst Peter Stephens said.

"The Alumina rating will also be affected if the Alcoa ratings are lowered significantly because of the strong links between the companies," he said.