Don't fixate on rumours: Consider taking profits on Alcan now

Troubled Brick Brewing is preparing a white-knight offer for Alcan as the race for top spot in aluminum comes to a boil.

"Brick needs to bulk up," say investment bankers close to the beer maker. "Aluminum is the primary ingredient in beer cans so the synergies are huge. Expect Moosehead to move."

You could almost be forgiven for thinking that's an actual report given how crazy the speculation over Alcan is getting.

The latest rumour is that Norsk Hydro is preparing a bid. Unnamed bankers say it's worth $30-billion (U.S.) plus. Hopefully there's a lot of plus because $35-billion is probably closer to what investors are looking for. The sources, who say they're close to the situation, also feed the speculative fire by suggesting that Norway's huge petroleum fund could help finance the deal. Sadly, it isn't allowed to invest in Norwegian companies.

If they are close to a deal, the sources are taking a pretty big risk leaking details to the media. It wouldn't be that hard to figure out who sang. Of course, it's possible that they're encouraged by their client, be it Alcan or Norsk, to float trial balloons, in which case you should be just as wary.

That's not to say Norsk or someone else won't make a move. But investors shouldn't fixate on rumours, however tantalizing a few more bucks might be. They should consider taking profits on Alcan now.

A better offer might happen, but there are many other possibilities, and not all of them end well for Alcan shareholders.

Alcoa's cash-and-stock offer is worth $75.55 (U.S.) per Alcan share, well below Alcan's market price. The acquirer's stock usually falls in these kinds of deals. Alcoa's is going up because investors are betting that someone will move on Alcoa too, whose stock has done next to nothing for years.

Hedge funds have been buying Alcoa since it announced the merger precisely for this reason, and other activist investors have been pressing Alcoa to break itself up or put itself on the block. If Alcoa becomes the prey, what happens to Alcan's share price?

If you're an Alcan shareholder, the trick is to consider that and all other possible outcomes in a probabilistic way. There is some probability of a significantly higher bid, say $10 a share over the current price. But the odds are small. One per cent maybe? There's a higher chance of a $5 a share increase. Five per cent? How about three bucks more? Fifteen per cent?

You can plug in your own probabilities, but using these, you've only covered roughly a fifth of the spectrum. What about a bid at market, a bid below market and no new bids. What are the percentages in those cases?

What is the possibility that Alcoa withdraws its offer (unlikely) or that Alcan turns the tables and makes an offer for Alcoa (remember, stock prices of companies making the bid usually fall).

Given all the downside possibilities, selling now is not a bad idea.

Again, a higher bid is very possible. The questions are how much higher and what are the odds. When the hostile offer was first announced, the usual reports circulated touting the possibility of rival bids from Rio Tinto, BHP Billiton, Xstrata and others.

Slowly, the facts start getting in the way of the theories. Xstrata has just sold off aluminum assets, for example. It is unlikely to bid on new ones. The Russian aluminum powerhouse, Rusal, itself formed via recent mergers, bought the aluminum assets of Xstrata's parent company. That's not to say Rusal can't make another bid, but it's (somewhat? considerably? a lot?) less likely given the work management has to do to integrate its acquisitions.

Rio and BHP? Maybe. But, as shown, you should be wary of the rumour mill. BHP CEO Chip Goodyear wants to retire this year. Will the board let him make a monster purchase and promptly leave the building? Unlikely.

The real fear for Alcan investors, as mentioned, is that the company, encouraged by the Quebec government or not, goes after Alcoa. It could