Alcan, Alcoa may face bust ups after takeovers

Get ready for the great aluminum bust up, as global mining companies prepare to bid for Alcan, and possibly hostile suitor Alcoa, and then carve up the companies.

"There is going to be a free-for-all this summer, with all kinds of interest in the different divisions of these companies," predicted a source working with Alcan, which fielded a hostile bid from Alcoa four weeks ago and is now attempting to entice better offers.

Both Alcan and Alcoa are home to two major businesses. The so-called "upstream" division converts bauxite into aluminum, through smelting and refining. "Downstream" factories then turn the metal into finished products, such as food packaging and auto parts.

Rival mining companies place a premium on owning upstream assets, while the downstream operations are attractive to manufacturers. So the highest potential bid for Alcan - or Alcoa, if it is put in play - may come from selling the company to two very different buyers.

The likely catalysts for break-ups are the world's two largest mining groups, potential Alcoa suitors BHP Billiton and Rio Tinto.  

"BHP and Rio Tinto are mining companies, they don't want to get into the auto parts and aerospace business," said a financier advising on the Alcan deal. He and a number of other bankers say both miners are weighing Alcan offers that would eventually see the company split up.

"The tactical issue is whether a mining company bids with a packaging partner, which is complex but more conservative, or whether you just buy Alcan and sell the downstream assets afterwards, knowing that private equity will line up with strategic buyers for the business," said the investment banker.

Two Indian companies, Hindalco Industries and Vedanta Resources, are each trying to strike partnerships that would allow them to purchase Alcan's downstream operations, according to a report last week in the Hindustani Times. The newspaper broke the news last year that Hindalco planned a takeover of Alcan spin-off Novelis, a deal that eventually played out for $5.9-billion.

Citing sources at the two companies, Indian media report Hindaclo is supporting BHP Billiton, while Vedanta is working with Rio Tinto.

Analysts view Rio Tinto as the one company that needs to do an acquisition, or risk being taken over. Its balance sheet has been run conservatively at a time when high commodity prices justified leveraging up to buy reserves. 

"We are told that Rio Tinto is looking at two options, a bid for Alcan or a bid for Alcoa, and has been for some time," said another investment banker working on this transaction.  While it enjoys a degree of takeover protection from protectionist state laws, Pittsburgh-based Alcoa has long been considered a target.

Here’s how the numbers work on Alcan. The company has two distinct 'downstream" divisions, a packaging business that is strong in North America and Europe and an engineered products group. In a recent report, TD Securities analyst Greg Barnes estimated that the packaging unit is worth $4.5-billion (U.S.) and the engineered products, which include aerospace parts makers, could fetch $3.8-billion.

Alcan's upstream operations, which include smelters and refineries in Quebec and B.C.., are worth up to $26.3-billion, Mr. Barnes estimated. Add it up, and this sum of the parts valuation totals $34.6-billion or $94.67 a share. Alcan stock closed Friday at $85.75 on the New York Stock Exchange.

Breaking up aluminum companies to improve their stock price is already in vogue. Alcan spun out a portion of its packaging business as Novelis in 2005. And prior to launching its bid for Alcan, Alcoa announced plans to sell part of its packaging operations as a new public company that is expected to be worth $4-billion.