UPDATE 3-Alcoa shares rise on Rio Tinto rumor, sources deny

Tue May 3, 2011 5:37pm EDT

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(Repeats item first published May 3)

* Alcoa shares up 2.8 pct, Rio down 1.6 pct

* Analysts, sources doubtful on Rio takeover chatter

* Companies decline to comment (Adds sources on banks, updates shares, changes dateline, previous NEW YORK)

LONDON/NEW YORK, May 3 (Reuters) - Alcoa Inc (AA.N) shares rose 3 percent on Tuesday on market talk that Rio Tinto (RIO.AX) (RIO.L) was lining up a bid to buy the U.S. aluminum company, but sources said two banks rumored to be financing the deal were not involved.

A senior banker at Santander (SAN.MC) denied the Spanish bank had secured a loan to finance a potential acquisition, which would combine the global No. 2 and 3 aluminum producers.

A source familiar with the situation said JPMorgan Chase was not involved in a rumored deal. The bank declined to comment.

Market talk that the two banks has secured a $25 billion syndication loan for Rio to buy Alcoa for $25.5 per share lifted the U.S. company's stock price more than 4 percent earlier the day.

Alcoa shares slipped in New York after the Santander denial and were trading at $17.79, up 3.3 percent, in the afternoon. Rio Tinto's London-traded shares were down 1.6 percent at 4331 pence.

Neither Alcoa nor Rio Tinto would comment on the rumors, and analysts said a combination of the two largest North American aluminum producers was unlikely and would face antitrust regulatory hurdles.

"I don't think aluminum is something Rio wants to double down with now after they purchased Alcan a few years back and probably regret it," said Bridget Freas, an analyst with Morningstar

"I think it's a bit inconsistent with their thinking," she added.

On Monday, analysts at Goldman Sachs upgraded Alcoa shares to "buy" from "hold." [ID:nL3E7G21W2]

In the options market, buyers loaded up on the $18 strike calls in Alcoa that expire later this month, as well as June $18 calls.

Investors often turn to equity call options, which grant them the right to buy the stock at a fixed price any time up until expiration, to speculate on share price appreciation.

"So some investors might be buying these calls on hopes for a takeover announcement in the near future. The May $19, June $19 and June $18 strike calls were also seeing heavy trading," said Frederic Ruffy, an options strategist at New York-based Web information site WhatsTrading.com.

Alcoa slashed its costs over the past two years when the global economic downturn sapped demand for the lightweight metal. While its earnings have pleased Wall Street and its shares have surged nearly 16 percent so far this year, analysts have been worried about its sales growth. [ID:nN1199754]

Aluminum prices have been moving higher, but have not reached levels seen before the recession.

One analyst said the market talk that Rio was interested in Alcoa had surfaced in the market before, but doubted that Rio was interested in the U.S. company currently.

"I don't think aluminum is something Rio wants to double down with now after they purchased Alcan a few years back and probably regret it," said Bridget Freas, an analyst with Morningstar

"I think it's a bit inconsistent with their thinking," she added.

Another analyst, who could not be quoted because he was not authorized to talk with the press, said the rumor of Rio's interest in Alcoa was nothing new, but a move by the company could face regulatory problems.

"They already own Alcan, so would there be an antitrust issue?" the analyst said.

"If someone had said BHP, I might be more inclined to believe it," the analyst added. (Reporting by Matt Daily, Megan Davies, Paritosh Bansal, Michael Erman, Steve James and Carole Vaporean in New York, Doris Frankel in Chicago and Tessa Walsh and Stefan Schaaf in London; Editing by Maureen Bavdek, Dave Zimmerman)

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