Alcoa-Alcan deal aims to forge aluminum powerhouse

NEW YORK/MONTREAL (Reuters) - Alcoa (AA.N) said on Monday it would make a hostile bid for Canada's Alcan Inc. AL.TO AL.N for nearly $27 billion, after talks between the two aluminum producers failed to lead to a deal.

If successful, the bid of $73.25 a share in cash and stock would create the world's largest producer of the metal, which is used in products ranging from beverage cans to airplanes.

Alcoa Chief Executive and Chairman Alain Belda said the planned link-up would better position the company to compete with fast-growing competitors. That group includes players such as Russia's RUSAL and China's Chalco (601600.SS), which saw its value nearly triple with its listing in Shanghai last week.

"Emerging global players in Russia, China, India and the Middle East are quickly expanding and adding capacity on a global basis," Belda told a conference call.

Montreal-based Alcan, which was split off from Alcoa in the 1920s because of antitrust concerns, said it plans to consider the proposal and advised shareholders to wait until it has fully reviewed the offer.

Shares of both companies jumped on the news, with Alcan's stock price rising above the offer price on expectations a higher bid may surface.

"I just think that Alcan was perennially undervalued and it was inevitable something like this would happen," said John Redstone, an analyst at Desjardins Securities.

An Alcoa-Alcan combination would control about 25 percent of the alumina raw material and primary aluminum markets and put its production capacity well above that of rival RUSAL.

Alcoa said its move comes after nearly two years of talks between the companies ended in November without a merger agreement. It put the enterprise value of the deal at $33 billion, including $6 billion in debt.

"We are very disappointed that those efforts did not result in a negotiated transaction -- a conclusion we would have strongly preferred," said Belda, adding, "therefore we are taking our offer directly to Alcan shareholders."

Alcoa, which is the world's largest aluminum seller in terms of revenues, said the combined company would see finished aluminum production capacity of 7.8 million tons compared to RUSAL's 4 million tons.

Its alumina capacity, the raw material used for the metal, would be 21.5 million tons versus RUSAL's 11 million.

The bid of $58.60 in cash and 0.4108 per share of Alcoa common stock represents a 32 percent premium to Alcan's average closing price on the New York Stock Exchange over the last 30 trading days.

Alcan's shares surged 35 percent to $90.57 in New York and 34 percent to C$90.57 on the Toronto Stock Exchange.

Alcoa shares rose $2.97, or 8.3 percent, to $38.63 in New York, a three-year high.

In its offer document filed with regulators on Monday afternoon, Alcoa said it had lined up $30 billion of financing from Citigroup and Goldman Sachs for the bid. The bid would remain open until 5 pm EDT July 10.

ANTITRUST HURDLES

Given the size of the two North American companies, a deal is expected to draw scrutiny from regulators, and Alcoa said it was prepared to sell off assets to win approval.

Belda told Alcan CEO Richard Evans he was confident they could resolve any regulatory concerns in a letter last year through "targeted divestitures" and by working with regulators to address competitive concerns.

Belda said the company had already spoken to some regulators on a preliminary basis, and cited the two companies' aerospace businesses as a potential issue.

Analysts said the takeover would probably require the approval from the Quebec government to keep in place a deal that gives Alcan access to low-cost electricity.

"It will be very interesting to see how that works out because if you lose that competitive advantage then suddenly the deal doesn't work," said, Gavin Graham, chief investment officer at Guardian Group of Funds.

In Quebec City on Monday, Economic Development Minister Raymond Bachand said he would divulge, possibly by Tuesday, details of Alcan's agreements with the province on power rates, waterways rights and investment commitments.

Alcoa expects the deal, which it hopes to complete by the end of the year, would create annual cost savings of $1 billion, beginning in the third year after closing, and add to cash flow and earnings per share in the first year.

It said the new company would have dual head offices in New York and Montreal and would have had combined revenues of $54 billion on an aggregate basis in 2006.

($1=$1.10 Canadian)

(Additional reporting by Euan Rocha and Carole Vaporean in New York and Scott Anderson and Cameron French in Toronto.)