Consolidation has been brewing in the aluminum industry since early this year. But it wasn't mining companies BHP Billiton, Xstrata or Rio Tinto going after Alcoa of the U.S.; instead, Alcoa made an unsolicited $28 billion did for Alcan of Canada. In effect, Alcoa is seeking to become the world's largest aluminum producer. The new combined company would have dual headquarters in New York and Montreal.
Naturally, Alcan's board of directors are urging shareholders to reject the Alcoa bid, claiming that the offer is too low. "This was entirely expected," says independent metals analyst Charles Bradford in New York. So, it's no surprise that Alcan has told the U.S. Securities and Exchange Commission that it is negotiating with third parties, presumably seeking a better deal.
Demand for aluminum, the light metals used in everything from airplanes to cars to packaging to consumer products of all stripes, is expected to grow about 7% this year, fueled mostly by China's growing appetite, and may double by 2020 to 60 million metric tons of production, according to Alcoa's estimates.
The Alcan buyout proposal comes at a time when aluminum ingots, which are heated and rolled into aluminum sheets, bars and other products, are selling for about $2,850 a metric ton on the London Metal Exchange. Though down from their record in July 2006, prices remain at historically high levels, partly due to strong demand from emerging markets, and are double what they were a few years ago.
Carol Levenson, director of research at Gimme Credit, an independent research firm on corporate bonds a New York, says in a note to clients that "Alcan is unlikely to go quietly," adding she wouldn't be surprised to see the company make stock-leveraging defensive moves—"perhaps even a Pac-Man defense of going after Alcoa." This anti-takeover tactic first gained currency in the 1980s, when it was dubbed the Pac-Man Defense after the popular video game in which players could change roles and go after their pursuers.
According to Securities and Exchange Commission filings, the companies had engaged in merger discussions in 2005 and 2006 and were near a deal until last December, when the companies couldn't agree on several points. That's when Alcan's directors and executives walked away from the deal, mush to the dismay of Alcoa CEO Alain Belda. "I'm thinking the Alcoa management did this as a defensive move" to short-circuit a possible reverse bid by Alcan, says Wayne Atwell, a former metals analyst at Morgan Stanley who now is involved in a hedge fund.
Alcoa has said the deal to reunite the two companies (once split up for anti-trust reasons) is necessary as companies in emerging markets are gaining clout. Companies such as Rusal in Russia, China Aluminum and Dubai Aluminum are expanding aluminum production in places where energy is better priced. "We are facing an increasingly competitive global aluminum industry," says Alcoa's Belda, pointing to the emerging market competitors during a conference call with analysts and investors.
"These two companies were once one company before anti-trust authorities required the divestment of Alcan by Alcoa," writes Bradford of Soleil Securities. "However, we believe that conditions in the industry have changed with the formation of a very large aluminum company in Russia (claiming to be the largest in the world) and the huge growth of aluminum output in China, nearly a 12 million ton annual rate in April. This is substantially larger than a combined capacity at Alcan and Alcoa of nearly 7.8 million metric tons."
The "merger transaction makes a lot of sense because it would put the Alcoa-Alcan firm on a larger scale to compete in the global market," Kirk Schmitt, who helps manage $1.1 billion at Victory Capital Management in Cleveland, tells the Bloomberg News Service. He says Alcoa would gain an edge over competitors by securing more supplies of Alcan's cheap electricity, whic
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