Rio Tinto Bids $38.1 Billion for Alcan

Rio Tinto Group agreed to buy Alcan Inc. for $38.1 billion, overwhelming a hostile bid by Alcoa Inc. to form the world's biggest aluminum maker.

Rio, the London-based miner of as many as 19 metals and minerals in six continents, will pay $101 a share in cash for Alcan, 33 percent more than Alcoa's bid of $76 a share. The combined aluminum business will be based in Alcan's hometown of Montreal and led by Alcan Chief Executive Officer Richard Evans.

Tom Albanese, 49, who became Rio's CEO in May, is planning the largest mining acquisition after the company shunned the mergers that have swept the industry in the past two years. Rio's $7.48 billion in profit last year was three times larger than Alcoa's, bolstered by record iron-ore and copper prices. Alcan on May 22 rejected Alcoa's unsolicited offer after two years of failed merger talks.

``Rio Tinto's aluminum business always needed beefing up as it doesn't have a critical mass,'' said Peter Chilton, who helps manage the equivalent of $1.4 billion at Constellation Capital Management in Sydney, including Rio shares. ``It's difficult to see how Alcoa can come back as they're not as strong financially as Rio, though it doesn't rule out other parties coming.''

Buying Alcan will increase Rio's aluminum output fourfold and enable it to leapfrog Russia's United Co. Rusal as the world's biggest producer of the metal used in beverage cans and airplane bodies, it said. Rio will acquire an aluminum producer employing 68,000 and operating in 61 countries. Alcan's revenue was $23.6 billion last year.

Metals Profit

Rio Tinto's net income jumped 47 percent last year on sales of $22.5 billion, while Alcoa earned $2.25 billion from sales of $30.3 billion. Rio Tinto said it will generate $300 million of annual benefits from the Alcan transaction in 2009, rising to $600 million by 2010.

Alcoa's shares jumped as much as 8.8 percent in New York on speculation it now will become a takeover target. Alcoa CEO Alain Belda, 64, was forced to make the May 7 bid for the Canadian aluminum producer following fruitless talks on a combination. Alcoa's financial advisers on the bid were Citigroup, Goldman, Sachs & Co., BMO Capital Markets and Lehman Brothers.

Alcan's accord with Rio includes a break-up fee of $1.05 billion to deter other bidders from going after Alcan.

More Takeovers

A five-year rally in metals has spurred more than $106 billion of proposed takeover offers in the mining and metals industry this year, following on from bids valued at $183 billion last year, according to Bloomberg data.

Aluminum has climbed 6.1 percent in the past year, lagging behind most other industrial metals. Lead has more than doubled, tin has gained 60 percent and nickel 36 percent. Copper, after reaching a record high in May last year, has dropped 2 percent.

The price of aluminum will rise next year to $3,086 a ton, or $1.40 a pound, according to Dan Brebner at UBS AG in London, because of rising raw material and energy costs. Aluminum for delivery in three months on the London Metal Exchange has averaged about $2,776 a ton this year and was at $2,835 today.

Shares of Alcan climbed $8.46, or 9.4 percent, to $98.06 as of 2:41 p.m. in New York Stock Exchange composite trading, after earlier reaching $99.97, while Alcoa gained $2.63, or 6.2 percent, to $45.06. Alcan has doubled since the beginning of the year. Rio fell 4.6 percent to 38.10 pounds in London.

Bigger Premiums

Companies are paying increasing premiums to purchase rivals in the aluminum industry. Rio is paying about 4.44 times Alcan's earnings before interest, taxes, depreciation and amortization, or Ebitda, according to data compiled by Bloomberg based on the company's past four quarters. When Apollo Management LP bought aluminum plants and a bauxite mine from Xstrata Plc in April, it paid 2.9 times estimated 2007 Ebitda, according to UBS AG.

Brazil's Cia. Vale do Rio Doce, the world's biggest iron- ore producer, said it hasn't ruled out a possible bid for Alcan, though no talks are planned. Vale Chief Financial Officer Fabio Barbosa said in a statement today that the Rio de Janeiro-based company is ``always analyzing opportunities to reinforce its strategic position.''

Rio Tinto has arranged financing for the purchase with Royal Bank of Scotland Group Plc, Deutsche Bank AG, Credit Suisse Group and Societe Generale. The loan will be ``syndicated in due course,'' Rio Finance Director Guy Elliott said on a conference call. He didn't specify how much the company plans to borrow.

Debt Rating

Rio's debt is rated A+ by Standard & Poor's and a step higher at Aa3 by Moody's Investors Service. The ratings are the fifth-and fourth-highest, respectively. In the statement, Rio said its ``goal'' is to maintain a single-A rating.

The deal will increase Rio's debt-to-equity ratio to ``a pretty high level'' of 64 percent, Elliott said. Moody's today placed Rio Tinto's $1.3 billion of rated debt under review for possible downgrade, depending on the company's plans to reduce borrowings.

Selling Alcan's packaging business may fetch ``several billion'' dollars, and further asset sales may take that figure into ``double-figure billions,'' Elliott said. The company also may consider selling new shares, he said.

Rio plans to sell Alcan's packaging business to focus on the company's so-called upstream business of mining bauxite and alumina and smelting aluminum. Alcoa is searching for a buyer for its packaging business, the company said April 25.

Quebec Deal

Rio said its offer conforms to an agreement that Alcan signed with the government of Quebec, giving access to cheap power and water rights and which depends on Alcan maintaining a ``significant'' presence in Quebec. The Montreal Economic Institute, a non-partisan think tank, estimates the advantages will cost the province about C$2.7 billion ($2.6 billion).

The offer ``exceeds'' the conditions of the so-called continuity agreement, Evans, 59, said in a phone interview.

Credit-default swaps on $10 million of Rio's debt rose $5,000 to $23,500, according to Deutsche Bank. The contracts, which investors use to speculate on a company's ability to repay debt, are at the highest in two years, according to data compiled by Bloomberg. An increase indicates deteriorating perceptions of credit quality.

Alcan, the world's third-largest aluminum producer, recommended Rio's offer, according to today's statement. Alcan had urged shareholders to reject New York-based Alcoa's cash and stock bid because it failed to offer enough of a premium. Alcoa's Belda said July 3 he would consider raising the offer.

Alcoa is reviewing Rio Tinto's bid for Alcan, spokesman Kevin Lowery said today by phone from Pittsburgh.

Alcan's Appeal

``Alcoa may decide it has to have Alcan no matter what and bid an outrageous price,'' said Douglas Lane, who oversees $1.9 billion, including 818,143 Alcoa shares at Douglas C. Lane and Associates in New York. ``At the moment we are comfortable holding our Alcoa stock. It's still pretty early in this ball game.''

Alcan is an attractive asset because it controls raw materials, about 50 percent of its own power and a pipeline of new metal projects, according to analysts. Power can account for about a third of the cost of producing aluminum.

``Alcan could be a good addition to the portfolio,'' Leo Larkin, a metals analyst at Standard & Poor's in New York, said before the announcement. ``Alcan's stock has been gliding along for a while on the rumor of another bid without anything happening.''

Aluminum will account for 32 percent of Rio's 2008 earnings after buying Alcan, up from 9 percent in 2006, Credit Suisse analysts led by Jeremy Gray said in a July 9 report. The acquisition may also add as much as 7 percent to Rio's earnings next year, depending on aluminum prices, they said.

Attractive Assets

``Alcan, with its proven operating expertise and unique set of competitively positioned aluminum assets and power sources, will be an excellent complement to our existing diversified portfolio,'' Rio said in today's statement.

Buying Alcan will take Rio's output of the metal to 4.3 million tons a year, enough to build 195,454 of Boeing Co.'s new 787 airplanes. It will also help it diversify away from copper and iron ore, which now account for 79 percent of its earnings. It will also combine Rio's bauxite and alumina operations with Alcan's low-cost smelting technology.

Alumina is refined from bauxite ore. Four or five tons of bauxite yield about two tons of alumina, which is then smelted into aluminum metal.

Deutsche Bank, CIBC World Markets Inc., Credit Suisse and N.M. Rothschild & Sons Ltd. are advising Rio. Alcan's bankers are Morgan Stanley, UBS, JPMorgan Chase & Co. and RBC Capital Markets. Citigroup Inc., Goldman Sachs Group Inc., BMO Capital Markets and Lehman Brothers are advising Alcoa.

Takeover Hiatus

Rio hasn't made a major takeover since 2000, lagging behind rivals Brazil's Cia. Vale do Rio Doce and Switzerland's Xstrata Plc, which have spent $34.4 billion between them buying Falconbridge and Inco Ltd. respectively.

``There is some concern that Rio may be left behind by the pack as the gap narrows between the five major'' mining companies, said Alfred Wong, who helps manage $12 billion of assets at UOB Asset Management Ltd. in Singapore. ``This deal will give investors some confidence.''

Rusal is currently the world's largest aluminum producer. The Moscow-based company overtook Alcoa in March when it was formed from the merger of OAO Russian Aluminium, domestic rival OAO Sual Group and the alumina assets of Swiss trader Glencore International AG.

World demand for aluminum will increase by 8.9 percent this year, compared with 6.9 percent in 2006, Alcan said in April. Aluminum inventories will remain at ``historically low levels'' of about 5 1/2 weeks of usage, Alcan said.

``Rio is coming at a fully valued offer, but not overpaying,'' Chris Tinker, head of ICAP Apollo, said today in a telephone interview from London. ``Strategically, the market will realize that it makes sense'' for Rio to pay this amount to get into ``the top level of producers,'' he said.

source:bloomberg.com