Rio Tinto emerges as Alcan white knight

July 15, 2007 - 0:0

Rio Tinto has broken with its prudent financial past by launching a $38.1b (£18.7b) cash offer for the Canadian aluminum producer Alcan, trumping a hostile bid from rival Alcoa.

The London-based company, the second largest miner in the world, said that Alcan's board of directors had agreed to the offer. Alcoa last night withdrew its $28b offer, making it in turn vulnerable to takeover, with BHP Billiton tipped as a likely bidder. The Rio Tinto bid is 65.5 percent more than the company was worth on May 4, just before Alcoa made its offer. The deal will create a new aluminum producer called Rio Tinto Alcan, based in Montreal and headed by Alcan's chief executive, Dick Evans. It will be the largest producer of aluminum and bauxite, overtaking Russia's Rusal and pushing Alcoa into third place. Alcan has been searching for a white knight since May 7 when Alcoa made its offer. It is understood it also talked to BHP Billiton and Brazil's CVRD. Yves Fortier, chairman of Alcan said: "We discovered very quickly that we had many friends who were ready to lend a helping hand." It finally settled for Rio Tinto, though it is understood the announcement of the deal was postponed from Monday to Thursday as BHP and CVRD were also in the final stages of tabling bids. Alcoa shares rose 6.7 percent on the news, helping to push the Dow Jones index to a record closing high the previous night, with strong sales figures and forecasts from leading U.S. retailers such as Wal-Mart adding to the ebullience. Analysts welcomed the Rio Tinto deal, although some balked at the price -- apparently intended to be high enough to deter a counter bid. The deal also contains a break-fee of $1b, if either party reneges. Rio Tinto said the tie-up created $600m a year in synergies. It gives it access to significant reserves of bauxite, the ore used to make aluminum, as well as low-cost hydro power. Alcan has only 7 percent of its operations powered by coal. Guy Elliott, Rio Tinto finance director, said: "In a carbon-constrained world, the aluminum production that relies on something other than coal is the one that is going to have the long-running advantage." Tom Albanese, Rio Tinto's new chief executive, is said to have been keen to expand into aluminum as Chinese demand for the metal increases. Aluminum prices have not risen as much as other commodities such as copper, nickel, or iron ore, but demand from China is expected to grow by 15 percent a year. Some analysts questioned why Rio Tinto had not decided to take over Alcan a year earlier, when the price would have been much lower. Elliott said: "It might have been cheaper but it wasn't necessarily available. In this kind of business, where the access to hydro-electric power is so important, we felt it was very important that this was a friendly transaction." The deal is a significant departure from the group's prudent financial policy. Standard & Poor's put Rio Tinto on negative watch, saying it could lower the credit ratings on the company in the next few weeks as the financing of the transaction would expose it to a "weaker financial profile" if metal prices fell. Rio Tinto said the acquisition would give it a gearing of more than 60 percent, but it has already decided to dispose of Alcan's downstream packaging business -- a unit that does not fit with Rio Tinto's largely upstream business. Elliott said Alcan had already been in discussions with "one or two people" to sell the unit, which analysts say could fetch more than $5b. Rio Tinto said it would divest some of the enlarged group's other assets following the deal. Elliott hinted at double-digit-billions-worth of disposals, adding the company might look at its property. "We have some buildings in St James's which are being redeveloped and that is one of the possible things that we might look at realizing value from." It is possible that others might come in with a bigger offer for Alcan. Apart from BHP and CVRD, Anglo American has been cited as a possibility. Chief executive Cynthia Carroll was head of one of Alcan's divisions. Rusal could also be interested. ------------------------ Back story Consolidation in the mining industry has reached fever pitch. The offer from Rio Tinto means Alcoa, the hostile bidder, could find itself at the receiving end of a bid. BHP Billiton is widely seen as a potential suitor. Recently, Switzerland's Xstrata and Russia's Norilsk Nickel battled it out for Canada's LionOre, with the Russian metals company winning with a $6.5b (£3.2b) bid. Areva, the French nuclear company, has offered $2.5b for uranium miner UraMin, while Canada's Teck Cominco has made a $4b offer for Aur Resources. (Source: The Guardian