Rio firms as likely buyer of Alcan

RIO Tinto has firmed as the favourite to reach an agreed $US30 billion-plus ($34.8 billion) merger with Canadian aluminium producer Alcan in a deal that would transform the top end of the global mining industry. A source close to the deal told the Herald that Alcan's board was in advanced negotiations with Rio on an agreed merger after it had received proposals from a few interested parties. It is understood Alcan, under the threat of a $US27 billion takeover offer from Alcoa, expects to reveal the identity of its white knight by the end of next week. Barring any spectacular last-minute offers, it is believed Rio is likely to emerge as the winner. Sources confirmed Rio recently hired Canadian investment bank CIBC World Markets to serve as an adviser alongside Deutsche Bank. An agreed merger between Rio and Alcan could lead to another mining company making a bid for Alcoa, the world's second largest aluminium producer - behind Russia's UC Rusal. BHP Billiton has reportedly hired Merrill Lynch to advise it on possible aluminium acquisitions. And it is believed that, despite earlier reports in London that Rio had hired Credit Suisse as an adviser, the Swiss investment bank is actually acting for Brazil's CVRD. The confusion might have come from the fact that CVRD's code on the New York Stock Exchange is RIO. CVRD's balance sheet was stretched by its $US20 billion acquisition of Canadian nickel producer Inco last year, a deal on which Credit Suisse served as CVRD's adviser. But sources said CVRD was eager to buy one of the aluminium companies and might be able to structure a creative deal. CVRD is rumoured to be in talks with private equity group TPG, which could indicate it is planning a joint bid or seeking a buyer for unwanted downstream operations. Rio and BHP are both engaged in on-market share buybacks but the process has been outsourced to third parties ahead of the release of their results next month. Both companies told the Herald that the outsourcing would allow them to continue the buybacks even if they possessed price-sensitive information. Alcoa yesterday said it had arranged $US30 billion of financing for its tilt at Alcan, from a range of international banks including ANZ. It has extended its offer until mid-August, but Macquarie Equities said it remained doubtful Alcoa would gain the necessary regulatory approvals by the end of the year. It is widely believed that by making a bid for Alcan after two years of friendly merger talks fell over, Alcoa has placed itself in play. Alcan is an attractive target because of its low-cost, hydro-powered smelters, but Alcoa owns cheaper refineries. Alcan's assets are a better geographical fit for Rio, while Alcoa's are a better fit for BHP or CVRD. It is possible Alcoa's high-cost smelters could be sold to a player such as Swiss commodities trader Glencore because they would represent attractive swing production in times of high prices.