Rio Tinto to buy Alcan for $38 billion

By Robert Melnbardis and Eleanor Wason

MONTREAL/LONDON (Reuters) - Anglo-Australian miner Rio Tinto Ltd/Plc (RIO.L) offered $38.1 billion to buy Canada's Alcan Inc AL.TOin an agreed deal to create the world's No. 1 aluminum producer, trumping a hostile bid by Alcoa Inc

(AA.N).

Alcoa withdrew its offer after markets closed on Thursday and is now seen as a potential takeover target itself.

Rio (RIO.AX), the world's No. 2 miner, said on Thursday it would pay $101 a share, 13 percent above Alcan's AL.N New York closing price on Wednesday and 33 percent above U.S. Group Alcoa's bid.

Rio said the deal would help it diversify beyond its strength in iron ore and copper, and boost its position in fast-growing aluminum markets.

Analysts and bankers familiar with the sector said the Rio offer, which beat Alcoa's cash-and-stock bid by about $24 a share, threatens Alcoa's independence.

"(It) makes them vulnerable to a BHP Billiton offer," said Charles Stanley analyst Tom Gidley-Kitchin.

BHP Billiton BHP.AXi would want to sell Alcoa's packaging and downstream metal-production businesses, people familiar with the matter said. BHP declined to comment.

Analysts speculated that Alcoa is a takeover target, in part because of its hostile offer for Alcan. Alcoa shares closed up 6.7 percent at $45.29 on the New York Stock Exchange, down from an all-time high of $46.15 earlier in the session.

Alcan's shares rose 9.9 percent during the session to close at $98.45 in New York, 2.5 percent below Rio's offer. In Toronto, the stock rose to C$102.75. Rio's shares in London fell 4.6 percent to 3,810 pence.

The mining industry is benefiting from soaring metals prices, and established players are seeking deals to fight rising competition from emerging markets.

"There is a lot of cash in the market and a lot of cash being generated in the mining sector generally, so you'll continue to see M&A across the board," said Greg Goodsell, equity strategist at ABN AMRO.

ALUMINIUM BEHEMOTH

The combined Rio-Alcan group will have the capability to make 4.4 million tonnes of aluminum a year, making it the top global producer ahead of the current leader, Russia's UC RUSAL. aluminum is used in a wide range of products from drinks cans to airplanes.

"The demand outlook (for aluminum) for the next 10 years is quite positive, with expected world demand growth to 2011 of over 6 percent and demand growth in China alone of over 15 percent per year," Rio Chief Executive Tom Albanese told a conference call.