Norsk readies Alcan bid

State-backed Norsk Hydro ASA of Norway is gearing up for a run at Alcan Inc., while the Canadian company studies the possibility of bidding for a rival, as the battle for dominance of the aluminum industry heats up.

Norsk Hydro has begun work on a $30-billion-plus (U.S.) bid for Montreal-based Alcan, according to investment bankers working with the two companies. Other mining giants, including BHP Billiton Ltd., are also contemplating offers that would compete with a hostile bid tabled this month by Alcoa Inc.

"There are advantages to Norsk," said one banker close to Alcan. "Obviously there are synergies there and there are certain similarities in terms of potential desires by governments. It has interesting potential."

If Norsk bids, it can tap one of the world's largest funds.

The aluminum company is 43-per-cent owned by the Norwegian government. That same government has built a $292-billion (U.S.) Government Pension Fund on the back of North Sea oil revenues.

Norsk Hydro's aluminum division accounts for just 4 per cent of global production, and it has 26,000 employees. Alcan has 65,000 staff, making 9.4 per cent of the world's aluminum - no player holds more than 11 per cent of the market.

Aluminum consumption is expected to double by the 2020, with most of the growth in Asia. Norsk Hydro's operations are focused on Western Europe, where aluminum use is expanding at a 4.4 per cent clip, according to McKinsey & Co. The consulting firm forecast Asian consumption will grow by 17.2 per cent.

Norsk Hydro has refineries in Australia, while Alcan has operations in China, Saudi Arabia and Australia.

Alcan is also trying to control its own fate, with the board and its advisers considering tactics that include a so-called Pac Man defence, which would see the Canadian company turn around and bid for its American suitor.

There are two roadblocks to the Pac Man attack, according to investment bankers working with Alcan - the takeover protection that Alcoa enjoys courtesy of state laws, and the possibility that Alcan would have to let its own shareholders vote on the Alcoa bid.

With hedge funds now holding a significant chunk of Alcan's stock, the bulk of the Canadian company's shareholders would likely favour the certainty of a sale over a drawn-out battle for Alcoa.

Canada's securities regulators adopted "National Policy 62-202" in 1997 and the rule could force Alcan to give shareholders a chance to vote on the Alcoa bid before it would be able to launch an offer for its rival.

The rule has never been tested, conceded a source close to the situation. Indeed, experts say an Alcoa offer might not need to be put up for a vote of Alcan shareholders. One investment banker working for the company said: "It depends on how you structure the transaction."

An Alcan bid for Alcoa could be financed by borrowing against the eventual sale of their downstream aluminum businesses, including Alcoa packaging assets that are already on the block. These asset sales would generate up to $15-billion and make the merger more palatable to regulators.

Alcan could then pitch a $45 (U.S.) a share offer at Alcoa, or a $39-billion bid, that was 50-per-cent stock and 50-per-cent cash, said one financier who has modelled the transaction.

Inco tabled an offer with a similar structure for Falconbridge last year, and did not put it to a shareholder vote. (Inco and Falconbridge were eventually taken over by rivals that made all-cash offers.)

One financier caught up in the takeover said: "I'd give the Pac Man option a 10-per-cent chance of success."

If a bidding war does break out, analysts forecast Alcan could fetch up to $90 a share, or $32.4-billion. Alcan shares closed Friday at $85 on the New York Stock exchange, while Alcoa closed at $40.90.

BHP Billiton is considered a serious contender for Alcan, but financiers who have worked with the world's biggest mining