Its Official – Rio Tinto makes all cash bid for Alcan to form aluminium giant

The Board of Canadian aluminium major, Alcan, is unanimously recommending to its shareholders an all-cash bid from the Anglo Australian mega miner, Rio Tinto, worth some US$38.1 billion, topping rival Alcoa's hostile bid for the company which was worth around $28.8 billion. Following the Alcoa bid, which Alcan directors seemed keen to oppose at any lengths, there have been numerous reports of the latter seeking a more acceptable, in its eyes, suitor. BHP Billiton was initially rumoured to be going to bid, but nothing has materialised (at least yet) from this source, but now the rumour mill suggests that BHP may be preparing a bid for the even bigger Alcoa, from which Alcan was spun off many years ago. The agreement between Alcan and Rio seems designed to ward off other suitors with a huge break fee applicable of $1.049 billion. While an Alcoa/Alcan merger would almost certainly have generated long anti-trust negotiations, although Rio Tinto does already have substantial aluminium business based around its Australian Comalco subsidiary, the operations are largely complementary geographically with the Alcan business and unlikely to raise so many anti-trust difficulties as a merger between North America's two aluminium majors - the world's second and third largest alumium companies after Russia's Rusal. The companies combined will produce around 4.4 million tonnes of aluminium a year which would currently make the entity the world's largest producer of the metal. The new company will be called Rio Tinto Alcan and will continue to be headquartered in Montreal as a Rio Tinto subsidiary, and will retain much of its present management including current Alcan chief executive officer, Dick Evans, will become chief executive of the combined aluminium product group, and will report directly to Rio Tinto's chief executive, Tom Albanese. Key positions in Rio Tinto Alcan will be filled by people from both organisations. Rio Tinto will add three new members to its board: two non-executive members of the Alcan board and Dick Evans as chief executive of the aluminium product group. The size of the board will therefore increase on closing from 13 to 16. The transaction is expected to create a new global aluminium industry leader in bauxite, alumina, power, aluminium and technology - with a strong pipeline of attractive growth projects for the future. Rio Tinto Alcan would be the largest global producer of aluminium and bauxite, based on current production. With Rio's mining/smelting/refining focus the two companies have agreed to divest Alcan's current downstream packaging business as part of the deal. This should be a relatively easy part of the business to dispose of and will help contribute towards the costs of the deal. Another key part of the merger involves the maintenance of Alcan's obligations under the Continuity Agreement with the Québec Government. This was signed in 2006 when Alcan, the Government of Québec and Hydro Québec agreed upon investments, loans, and further water and power rights. Alcan then made an undertaking that it would maintain its head office and principal place of business in Québec and that it would ensure that, in the event of a change of control, the acquirer would maintain the same level and quality of commitments in Québec to socioeconomic programmes and to regional development as then existed at Alcan. Rio Tinto has given assurances, evidence and commitments to the board of Alcan and the Government of Québec that Rio Tinto Alcan will maintain its head office and principal place of business in Québec together with the same level and quality of commitments as now exist at Alcan, and has demonstrated to the satisfaction of the board of Alcan that the requirements of the Continuity Agreement have been met and is notifying the Government of Québec accordingly. OPERATIONAL SYNERGIES One of the key factors behind the proposed merger appears to be the synergies in the business approaches of the two companies - something which perhaps Alcan felt might not have been the case with a merger with Alcoa. In commenting on the proposed deal, Alcan CEO Dick Evans comments "As we move ahead together, we will remain true to our shared values, including commitments to the environment, health, safety and sustainability, and our focus on creating value. There is no doubt that there are huge potential operational and geographical synergies also in a Rio Tinto/Alcan combination. The two companies' operations have little overlap in terms of geographical locations, although perhaps this makes the potential cost savings of consolidation which are part and parcel of many mergers and acquisitions nowadays may be more limited. Nevertheless, in commenting on the acquisition, Rio Tinto's CEO, Tom Albanese commented "This transaction will enable Rio Tinto's shareholders to benefit from the quality of Alcan's organisation and asset portfolio, the favourable demand fundamentals of the aluminium sector and the synergies and enhanced development opportunities which the combination of our businesses will deliver. The acquisition will be value enhancing to shareholders, and we expect it to be earnings and cash flow per share accretive to Rio Tinto in the first full year. Rio Tinto intends to retain its focus on mining and metals activities by the divestment of Alcan's Packaging division, as jointly agreed with Alcan. The Engineered Products division will be retained with a focus on managing the portfolio for optimum value." As is often the case in merger activity, Rio Tinto's shares which had shot up at the end of last week on speculation that a deal was imminent, fell back 1.4 percent once the costs of the deal had become apparent, reducing hopes of a special dividend from the company's strong cash position. Nevertheless if Tom Albanese's take on the financial implications of the deal are correct, the combination will enhance Rio's reputation as being probably the most successful mining corporation in terms of shareholder returns. The combination will mean a big lift in market capitalisation without any share dilution, which should be long term positive for Rio stock.