Alcoa, Alumina Rise as Alcan Deal May Spur Takeovers

Shares of Alcoa Inc. and Alumina Ltd., partners in the world's biggest alumina venture, rose to records on speculation that Rio Tinto Group's $38.1 billion bid for Alcan Inc. will spark more aluminum-industry takeovers. BHP Billiton Ltd. might bid for New York-based Alcoa and Alumina, UBS AG analysts Glyn Lawcock and Mark Busuttil said in a report yesterday. Alcoa also may try to buy Melbourne-based Alumina, which owns 40 percent of the Alcoa World Alumina & Chemical joint venture, the analysts said. Alcoa withdrew its $27.7 billion bid for Alcan late yesterday, reviving speculation that Alcoa may become a target for a takeover. Melbourne-based BHP, the world's largest mining company, may try to link up with private equity firms to make a $40 billion bid for Alcoa, the London-based Times said July 10. "Alcoa is in the businesses that BHP would like to have," said Charles Bradford, an analyst at Soleil Securities in New York, who estimates Alcoa might fetch $54 a share based on what Rio Tinto is paying for Alcan. "They could be a good fit, though BHP isn't interested in Alcoa's packaging units." Alcoa said April 25 that it's looking for a buyer for the packaging business. Rio Tinto, based in London, said yesterday it plans to sell Montreal-based Alcan's packaging unit. Alcoa shares rose $2.06, or 4.6 percent, to $47.35 in New York Stock Exchange composite trading. That gives the company a market value of $41.2 billion. Alumina Shares Alcoa may be worth as much as $59 a share now that the risk of a bidding war for Alcan is gone, David Gagliano, an analyst at Credit Suisse, said today in a note to investors. He boosted his price target to $55 from $45. Rio Tinto agreed to buy Alcan yesterday, trumping Alcoa's bid by 33 percent. Shares of Alumina rose 15 cents, or 1.8 percent, to A$8.55 on the Australian Stock Exchange, giving the company a market value of A$10 billion ($8.7 billion). The stock has risen 35 percent this year, beating the 13 percent gain on the benchmark Australian index. "We believe Alumina would be taken out in any Alcoa bid so as the acquirer has access to 100 percent of the venture's cash flows," said Atul Lele, who helps manage the equivalent of $380 million at White Funds Management in Sydney. Alumina gets all its earnings from the Alcoa venture. BHP shares rose to a record in Australian trading on speculation the company may bid for Alcoa. BHP spokesman Illtud Harri declined to comment. Credit Swaps Credit-default swaps based on $10 million of BHP bonds rose 5.5 percent to $19,000 at 1:15 p.m. in Sydney, from $18,000 yesterday, according to ABN Amro Holding NV. Investors use the contracts to speculate on credit quality. The costs, or spreads, increase as the perception of creditworthiness deteriorates. Standard & Poor's Inc. today rated the outlook for Alcoa's debt as stable, after the aluminum producer withdrew its offer for Alcan yesterday. S&P had indicated May 7 that it might downgrade its BBB+ rating, the third-lowest investment grade. "Given inflationary pressures and growth prospects in the alumina markets, Alcoa is implementing necessary strategic initiatives at its upstream operations that should allow it to maintain its competitive business position over the longer term," S&P credit analyst Thomas Watters said in a report. A five-year rally in metals has spurred more than $149 billion of proposed takeover offers in the mining and metals industry this year, including Rio Tinto's offer for Alcan, compared with $183 billion last year, according to data compiled by Bloomberg. Alumina will no longer be reviewed by Standard & Poor's for a possible cut to its credit rating after Alcoa withdrew its offer for Alcan. There was concern that Alumina would have to buy new bauxite and alumina assets from Alcoa if the Alcan bid had succeeded, S&P said in a statement today. Aluminum metal, used in aircraft and beverage cans, is smelted from alumina, a secondary material that is refined from bauxite ore.