Rio Tinto Swipes Alcan From Alcoa

Rio Tinto scooped up Canadian aluminum miner Alcan on Thursday, with a $42.5 billion takeover offer that American rival Alcoa could not match. All of a sudden, there's a big target on Alcoa (nyse: AA - news - people ). The American aluminum company late Thursday said it was giving up its hostile offer for its Canadian rival, which essentially means the unsuccessful bidder is itself now in play. “Rio’s offer for Alcan strongly reinforces our view of the underlying value in the aluminum industry and its bright prospects for the future,” said Alcoa Chairman Alain Belda. “However, at this price level, we have more attractive options for delivering additional value to shareholders." Along those lines, Alcoa reinstituted a share buyback plan that had been suspended during its Alcan bid, but it is likely that value will be delivered to shareholders by a bidder for the entire company. Under its friendly offer for Alcan, Rio Tinto (nyse: RTP - news - people ) is offering far more money -- $101 a share in cash versus an Alcoa offer of roughly $76 that includes a stock component – and the enlarged company will be based in Montreal and be led by Alcan’s current chief executive officer, Dick Evans. The Rio Tinto offer was expected, but the generosity shown to Alcan's owners and management was not. (See "Rio Tinto Bid For Alcan Nearing?" ) The overall value is more than $9 billion richer than the Alcoa bid. It includes the assumption of about $5.2 billion of debt and a cash payment of $37.3 billion. That price sounded just about right to investors. Shares of Alcan share surged 9.9%, or $8.85, to close at $98.45, on Thursday. Meanwhile, shares of Rio Tinto closed down 2.1%, or $6.71, at $317.71, but the stock has been hot in recent weeks. It was below $200 at one point in March. There wasa lot at stake for Alcoa. Since it did not win its Alcan bid, Alcoa is likely to become takeover bait itself, with the logical acquirer being BHP Billiton (nyse: BHP - news - people ), Rio Tinto's larger Australian rival. Unless and until that happens, Rio Tinto Alcan, as the enlarged company will be called, will displace Alcoa as the world's largest aluminum producer. Rio Tinto is a major miner of copper and gold and also produces coal in its well-diversified portfolio of minerals. Aluminum production accounted for 10% of Rio’s 2006 earnings of $7.3 billion. Rio has a stated goal to expand beyond its traditional aluminum heartland in Australia and North America through both organic and acquisitive growth. With that kind of weight, Rio clearly had the cash power to slap down a big dowery. But at $101 a share, Alcan may have come at an expensive price. The offer values Alcan at 16.3 times this year's expected earnings of $6.20 a share, above the aluminum sector's 15.3 multiple. At the bid price Alcan's price to book value was 3.1, however, versus the sector's 4.1. So as a straight asset play, the deal was sensible for Rio Tinto. But Rio is looking beyond Alcan's books. With the global demand in metals rising, Rio hopes to capitalize on economies of scale and take advantage of the boom. "The demand outlook for the next 10 years is quite positive, with expected world demand growth to 2011 of over 6% and demand growth in China alone of over 15% per year," said Chief Executive Tom Albanese of Rio Tinto. According to a joint statement on Thursday, the combined company's "access to significant bauxite reserves, competitive alumina refining, low-cost hydro power, leading smelter technology, and a deep and diverse talent pool" will put it in "an excellent position to capitalize on the favorable demand fundamentals of the aluminum industry." To retain Rio Tinto’s sharp focus on mining and metals, the combined entity would divest Alcan's packaging division and undergo a strategic review of Rio Tino’s assets to whittling down those deemed lacking long-term competitiveness. In addition, Rio expected the acquisition would be earnings and cash-flow accretive from the first full year, with annual savings of about $600 million Australian dollars ($517.7 million). Alcan Chairman Yves Fortier said the transaction, in addition to its obvious cash premium, would offer Alcan shareholders a clear path to completion given the limited operation overlap and a mutual commitment to “an expeditious close,” adding that Rio would honor Alcan’s social and economic commitments made in 2006 to the government of Quebec. Fortier's effusive praise for Rio Tinto contrasts sharply with the company's recent correspondence to Alcoa. In response to Alcoa's indication that it would sweeten its bid, Evans had tersely replied with a two-sentence e-mail. "At this point we see no reason to engage in further discussions or correspondence," he said. (See: "Alcan to Alcoa: 'Can It' ") Given the ongoing consolidation in the metals and mining industries, it's not a question of when the next big deal will break out-- that answer is: soon-- it's a question of, who's next. Then again, that answer also seems locked up. Alcoa's stock surged 6.7%, or $2.86, to close at $45.29, in Thursday trading.