UPDATE 8-Rio Tinto to buy Alcan for $38 bln, Alcoa bows out

(Adds Alcoa withdrawal, updates share prices to close)

By Robert Melnbardis and Eleanor Wason

MONTREAL/LONDON, July 12 (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 aluminium 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 aluminium 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 aluminium a year, making it the top global producer ahead of the current leader, Russia's UC RUSAL. Aluminium is used in a wide range of products from drinks cans to airplanes.

"The demand outlook (for aluminium) 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.

Rio said it would fund the deal from newly committed bank facilities and sell Alcan's packaging business, which has annual revenue of $6 billion.

Packaging is most likely to go to a trade buyer, rather than private equity, one person close to the matter said. Alcan said it has been in talks with prospective bidders.

Rio said it did not anticipate problems with competition regulators. Antitrust had been seen as an issue for an Alcoa-Alcan tie-up, with particular overlap in aerospace.

Rio said it expects the deal to boost earnings in the first year and to achieve $600 million of annual savings, with about half that total realised in 2009.

Numis Securities analysts estimated the deal would boost Rio's 2008 earnings by 10 percent to 12 percent.

They said Rio's offer was worth about 14.9 times Alcan's forecast 2008 earnings, a modest premium to the sector.

Alcan Chief Executive Dick Evans will head the combined aluminium business, to be called Rio Tinto Alcan and based in Montreal.

Alcan and Rio have agreed to a termination fee of $1.05 billion.

ALCAN BIDDERS CIRCLED

The possibility of a rival bid for Alcan had been high since Alcoa launched its hostile offer in early May. Alcan rejected the Alcoa bid many times, calling it inadequate.

In withdrawing its offer, Alcoa said it had better ways of boosting shareholder value. Alcoa said it was reinstituting its share repurchase program, which had been suspended while the Alcan bid was open.

Alcan said on Thursday it had been involved in "multiple major discussions."

Brazil's Companhia Vale do Rio Doce (CVRD) (VALE5.SA) and Rio both made offers for Alcan before being asked for second and final bids by Tuesday night, according to people familiar with the situation.

Both bidders met with conditions demanded by Alcan, such as commitments to investment in Quebec and global expansion projects, but Rio's offer was higher, one of the people said.

CVRD said in a statement it was not ruling out a bid for Alcan in the future but was not currently in talks.

Bankers familiar with the sector said it would be hard to beat Rio's offer, as any rival bidder would have to put up more than $40 billion, beating Rio's premium and paying the break-up fee, plus meet local government conditions.

Rio said it had secured new banking facilities underwritten by Royal Bank of Scotland (RBS.L), Deutsche Bank (DBKGn.DE), Credit Suisse (CSGN.VX) and Societe Generale.

Rio's main advisers on the deal are Deutsche Bank and CIBC. Alcan is being advised by Morgan Stanley (MS.N), JP Morgan (JPM.N), UBS (UBSN.VX) and RBC Capital Markets. (Additional reporting by Caroline Humer in New York, Mark Potter and Mathieu Robbins in London, Jim Regan, Geraldine Chua and Michael Smith in Sydney, and Cameron French in Toronto)