Potential New Bidder On Alcan's Horizon

Canadian aluminum smelter Alcan is drawing suitors from all around the world. With the American Alcoa already on board and the Australian BHP Billiton and Rio Tinto rumored to be interested, investors can now add one more name to the fray: Norway's Norsk Hydro.

According to the Globe and Mail, the Norwegian aluminum company is preparing an offer worth more than $30 billion to edge out its larger rival, Alcoa (nyse: AA - news - people ). Last week, Alcan rejected Alcoa’ $32.9 billion but said it may entertain higher offers by its competitor. (See: "Does Alcan Have a New Suitor?" )

While Alcan is not naming names, the Montreal-based company has confirmed that it is also talking to third parties about a potential deal. (See: "Alcan Could Attract More Bids." ) BHP Billiton (nyse: BHP - news - people ) and RIo Tinto (nyse: RTP - news - people ), have been rumored bidders.

Shares of Alcan were up 2.8%, or 2.60 Canadian dollars ($2.40), to 94.25 dollars ($87.27), in Montreal trading on Monday. The Alcoa cash-and-stock bid is worth only $75.40 at the American company's closing price of $40.90 on Friday.

It will be difficult for the Oslo-based company to swallow the third-largest aluminum producer in the world, but it’s an expensive play Norsk Hydro (nyse: NHY - news - people ) may be willing to make. After the formation in Russia of the United Company of Rusal, completed in March and currently the world’s largest aluminum producer, Norsk Hydro’s prominence in the industry has slipped. An Alcan and Alcoa merger, which would create an entity even greater than Rusal, would further dwarf Norsk Hydro’s standing by “leaving a large gap between the two major players and Norsk Hydro, a medium sized, number three,” Fondsfinans ASA analyst, Kjetil Bakken, told Forbes.com. But if Norsk Hydro manages to win Alcan, then it will supersede its old rivals and gain the top spot.

An Alcan acquisition would also be in line with the company’s current strategy to expand its global footprint in the aluminum industry as it sheds unrelated business units. For the last three years, Norsk Hydro has aggressively undergone a massive overhaul, taking major moves to exit the petrochemical, fertilizer, and other businesses. In 2004, the company spun off its entire fertilizer business, and last year, the company agreed to merge its oil unit with Statoil (nyse: STO - news - people ) to create Statoil-Hydro. The deal has already passed major regulatory hurdles and is expected to be completed by the third quarter of 2007.

“Before, Hydro was focused on making the Statoil deal happen, and now that it’s almost finished, it’s getting hungry for aluminum businesses,” Bakken said. The company will be virtually debt free at the end of the Statoil deal, putting it in a healthy position for a new acquisition.

The buyout of almost any “big brother” would provide strategic value, but “Alcan would be on the top of its list,” Bakken said.

Among aluminum industry players, Alcan is widely regarded as a solid producer, with a strong cost base, valuable assets and top-of-the-line technology for aluminum smelting. The two companies also share a history of collaboration. Norsk Hydro may not be Alcan’s former parent, a title Alcoa can claim, but the companies have partnered on major projects in both of their backyards. For instance, Alcan and Norsk Hydro have a stake in a Canadian smelter, called Alouette, which produces 550,000 metric tons of aluminum per year.

However, for Norsk Hydro, the greatest stumbling block in an Alcan buyout could be the price. As an aluminum producer, Alcan is about twice of the size of Norsk Hydro, according to Bakken. Some analysts believe that Alcoa may eventually sweeten its deal to $85 a share. That would bring it to about $36.6 billion. However, Norsk Hydro has one powerful backer in its corner: the Norwegian government, which owns a 44% stake in Hydro, co