Rio Tinto takes lead in Alcan race

Alcan Inc. has begun negotiating toward a merger agreement with Rio Tinto PLC in a move designed to help the Montreal-based aluminum maker fend off a $28-billion (U.S.) hostile takeover bid from U.S. rival Alcoa Inc., according to sources. While Alcan declined to comment specifically on any talks yesterday, it did indicate that efforts to find a friendly suitor have intensified in recent weeks. Indeed, sources said Rio Tinto hired investment bank CIBC World Markets Corp. over the weekend to help it prepare a potential transaction with Alcan. In a filing with securities regulators, Alcan said it "has undertaken negotiations concerning potential strategic transactions and alternatives to the Alcoa offer." This marked an escalation from Alcan's disclosure in May, when it only revealed it was in "discussions with third parties." Alcan has been the subject of heated speculation since Pittsburgh-based Alcoa tabled its unsolicited takeover offer in early May, following two years of halting merger discussions. A combination of the North American aluminum powerhouses would create the world's No. 1 producer of the metal, eclipsing Russia's UC Rusal. However, other mining giants have privately expressed an interest in acquiring Alcan amid a chance to snap up the Montreal company's coveted smelting operations in Quebec, British Columbia and elsewhere, which are prized for their access to cheap hydroelectric power. BHP Billiton Ltd., the world's largest mining company, is thought to have approached Alcan and entered a data room that the aluminum maker established for prospective bidders. However, sources say BHP is now looking at a potential takeover of Alcoa. That would thrust Rio Tinto into the driver's seat in the race to wrest control of Alcan. Rio Tinto already has a major bauxite operation in Australia, as does Alcan, which would give the combined company a powerful hold in one of the key materials in aluminum production. The diversified miner is currently the world's eighth-largest aluminum maker, producing roughly 820,000 tonnes of aluminum products each year. One analyst suggested Monday that an acquisition of Alcan could boost Rio Tinto's profit next year by a much as 7 per cent. Jeremy Gray, an analyst with Credit Suisse in London, estimated that aluminum would account for almost one-third of Rio Tinto's profit before interest and taxes, up from 9 per cent, if the two sides are able to complete a deal. The analyst assumed that the two would achieve cost savings of $250-million in 2008. A deal with Alcan would mark a major shift in strategy for Rio Tinto under its new CEO, Tom Albanese, and represent its first large deal since the acquisition of North Ltd. in 2001. Amid an unprecedented five-year rally in base metals such as copper and nickel, aluminum has been the worst performer, lagging the gains enjoyed by other commodities. Alcan spokeswoman Anik Michaud said Alcan is now negotiating with more than one party about a possible alternative to Alcoa's cash-and-stock offer. She said discussions have "evolved," and explained that the shift in disclosure with U.S. regulators was made for legal reasons. "The discussions have moved to negotiations and, as the filing says, they have signed confidentiality and standstill agreements," Ms. Michaud said. In addition to CIBC, which will act as its Canadian adviser, Rio Tinto is also understood to have hired other global investment banks to work on the Alcan file. Reports have identified Deutsche Bank and CSFB as Rio's advisers. Alcoa's chief executive officer Alain Belda said this week that his company's offer is the best alternative for Alcan and will achieve more than $1-billion in synergies. Mr. Belda's counterpart, Alcan CEO Dick Evans, rebuffed Alcoa's attempts to gain access to Alcan's data room last month, even after Mr. Belda indicated Alcoa might be prepared to sweeten its bid, suggesting that the Montreal company was confident it could find another deal. Alcoa extended its offer from July 10 until Aug. 10 and is expected to extend the bid again as it waits for various regulatory approvals from antitrust authorities in the United States, Canada, Australia and Europe. Alcoa has yet to file a formal application with European regulators. The company said yesterday that is has lined up a $30-billion credit facility with its lenders that it will use to pay for Alcan shares. ALCAN INC. Close: $90.20 (Cdn.), down 85¢ ALCOA INC. Close: $41.66 (U.S.), down 70¢ Rio Tinto London-based Rio Tinto takes its name from a Spanish river that translates into Red River. The company was formed in 1873 to work a Spanish copper lode that was first mined by the Roman Empire. In 1962, Rio Tinto merged with Consolidated Zinc of Australia and is now the world's third-biggest miner, with a market value of £38.95-billion ($83.3-billion). Its operations span the globe but it is strongest in North America and Australia. Rio Tinto's Canadian operations are in the Northwest Territories and Quebec. The company's biggest product is iron ore, followed by copper and coal.