Alcan downgraded by analyst

Alcan Inc. was downgraded by an analyst Wednesday, who raised concerns about its high valuation as the company remains mum on whether it will find a friendly bidder to fend off Alcoa Inc.

"We cannot rule out the possibility of a third party emerging as a white knight to (Alcan). However, we don't believe other potential acquirers could generate the same level of synergy opportunities (as Alcoa)," Bear Stearns analyst Anthony Rizzuto wrote in a note to clients as he cut the stock from "outperform" to "peer perform."

It closed at $88.47 on the Toronto Stock Exchange Wednesday, up 74 cents for the day.

Rizzuto also brought up the possibility of Alcan using the so-called "Pac-Man strategy" and making a hostile bid for Alcoa. He figures such a move would cause Alcan shares to "fall sharply to perhaps the midpoint of between the current level and the price immediately prior to the (Alcoa) bid," which adds to the downside risk in the stock.

It has been more than five weeks since Alcoa launched its surprise $33-billion US hostile bid for Alcan. Alcan shares continue to trade more than 10 per cent above the offer price. The bid is set to expire July 10.

Like Rizzuto, Alcoa has said all along it has synergies with Alcan that no one else could match. It estimated that the combined company could generate $1 billion US in annual savings, while Alcan suggested the number was $1.5-billion in its own circular. Mining giants like BHP Billiton PLC and Rio Tinto PLC, who are thought to be interested in Alcan, are not likely to match those numbers since they do not have comparable aluminum assets in North America.

Those companies would also have to meet Alcan's continuity agreement with the province of Quebec, which would force them to keep head office functions in Montreal. Both Rio and BHP would have to invest in new headquarters. In the case of Rio Tinto, it might have to move its aluminum business, Comalco, all the way from Australia. Alcoa has a plan to consolidate its primary metals business in Montreal.

John Kinsey, a portfolio manager at Caldwell Asset Management, said that Alcoa still faces a bigger challenge than any other Alcan suitor because it has to work around the antitrust concerns.

"They seem to think they can do it, but the market is telling you a white knight will come," he said.

Meanwhile Alcan announced a key deal in its aerospace business Wednesday, signing a multi-year supply contract with Airbus SAS for a wide variety of aluminum products. Financial terms were not disclosed.