Alcan may turn tables on Alcoa

State-backed Norsk Hydro ASA of Norway is gearing up for a run at Alcan Inc., while the Canadian company studies the possibility of bidding for a rival, as the battle for dominance of the aluminum industry heats up.

An also-ran in a global metals industry that is consolidating around its largest players, Norsk Hydro has begun work on a $30-billion-plus (U.S.) bid for Montreal-based Alcan, according to investment bankers working with the two companies. Other mining giants, including BHP Billiton Ltd., are also contemplating offers that would compete with a hostile bid tabled this month by Alcoa Inc.

"There are advantages to Norsk," said one banker close to Alcan. "Obviously there are synergies there and there are certain similarities in terms of potential desires by governments. It has interesting potential."

If Norsk bids, it can tap one of the world's largest funds for support.

The aluminum company is 43-per-cent owned by the Norwegian government. That same government has built a $292-billion (U.S.) Government Pension Fund on the back of North Sea oil revenues.

Buying Montreal-based Alcan means gaining market leadership and unique assets that include access to hydroelectric power in Quebec.

Norsk Hydro's aluminum division accounts for just 4 per cent of global production, and it has 26,000 employees. Alcan has 65,000 staff, making 9.4 per cent of the world's aluminum — no player holds more than 11 per cent of the market.

Aluminum consumption is expected to double by the 2020, with most of the growth in Asia. Norsk Hydro's operations are focused on Western Europe, where aluminum use is expanding at a 4.4 per cent clip, according to McKinsey & Co. The consulting firm forecast Asian consumption will grow by 17.2 per cent.

Norsk Hydro has refineries in Australia, while Alcan has operations in China, Saudi Arabia and Australia.

In mounting a bid for Alcan, the challenge facing Norsk Hydro is every other aluminum producer in the world is after the company. One investment banker working with Alcan said the steep competition facing the Norwegians and cost-cutting advantages available to rivals mean: "I'm not sure how feasible [a Norsk Hydro bid] is at the end."

Alcan is also trying to control its own fate, with the board and its advisers considering tactics that include a so-called Pac Man defence, which would see the Canadian company turn around and bid for its American suitor.

There are two roadblocks to the Pac Man attack, according to investment bankers working with Alcan — the takeover protection that Alcoa enjoys courtesy of state laws, and the possibility that Alcan would have to let its own shareholders vote on the Alcoa bid.

With hedge funds now holding a significant chunk of Alcan's stock, the bulk of the Canadian company's shareholders would likely favour the certainty of a sale over a drawn-out battle for Alcoa.

Canada's securities regulators adopted "National Policy 62-202" in 1997 and the rule could force Alcan to give shareholders a chance to vote on the Alcoa bid before it would be able to launch an offer for its Pittsburgh-based rival.

The rule has never been tested, conceded a source close to the situation. Indeed, experts say an Alcoa offer might not need to be put up for a vote of Alcan shareholders. One investment banker working for the company said: "It depends on how you structure the transaction."

An Alcan bid for Alcoa could be financed by borrowing against the eventual sale of their downstream aluminum businesses, including Alcoa packaging assets that are already on the block. These asset sales would generate up to $15-billion and make the merger more palatable to regulators.

Alcan could then pitch a $45 (U.S.) a share offer at Alcoa, or a $39-billion bid, that was 50-per-cent stock and 50-per-cent cash, said one financier who has modelled the transaction.

Inco tabled an offer with a similar stru