Alcan bidding seen hitting low ceiling

Sorry to be a wet blanket, but the bidding war for Alcan is unlikely to have the excitement and rewards provided by last summer’s pitched battles for Inco and Falconbridge.

Analysts have been busy gaming outcomes for the aluminium industry since Alcoa put its Canadian rival in play last month with a cash-and-shares bid valued at $73.25 (U.S.) Sadly for investors, including the hedge funds that are piling in, the pros see this battle topping at quickly.

As Alcan closed yesterday at $85.89 on the NYSE, TD Securities analyst Greg Barnes published a report that blended three different methods for putting a price on the stock. His most conservative estimate was Alcan is worth $80, while the best-case scenario was $95. This range is consistent with other analysts on the Street.

“If multi-party bids do appear for Alcan, the ultimate take-over valuation could approach the high $80 (U.S.)-a-share range,” Mr. Barnes concluded. BHP Billiton and a number of other mining conglomerates are now sizing up Alcan, and Alcoa.

For what it’s worth, many of the hedge funds are putting on what’s jokingly called a Texas hedge. Rather than taking the low-risk approach of buying the target stock and short selling the potential buyer, they are going long both Alcan and Alcoa, on the theory that both get bought.
But why no bids and counter-bids to propel Alcan into the stock stratosphere, as was the case in last summer’s nickel mining takeovers? The difference lies in the underlying metals.

Whoever bought Inco established a hammerlock on nickel supplies. Brazil’s CVRD is now in the enviable position of playing a critical role in setting the price for the commodity it produces.

That is not the case at Alcan, or Alcoa. The raw material they process is plentiful. Buyers are after refineries. And since much of the cost of producing aluminium comes from the energy used in refining, buyers also want low-cost electricity. That’s why Quebec and its state-owned electrical utility feature so prominently in these talks. There is a ceiling on how much any mining company will spend for refineries and electricity contracts.