Alcoa's Rio stake has Wall St in search of motive

NEW YORK (Reuters) - Alcoa Inc AA.N may be acting more like a hedge fund these days than the largest U.S. aluminum company.

By making a $1.2 billion investment as part of Aluminum Corp of China's (Chinalco) $14 billion purchase of a 9 percent stake in Rio Tinto Plc RIO.L, Alcoa has in effect made another bet on China's voracious appetite for aluminum by getting even closer to the state-owned player.

It is also a chance to make a quick buck should BHP Billiton Plc BLT.L raise its bid for Rio, currently valued at about $126 billion.

But the move had some analysts and investors -- already anxious to see some bold Alcoa moves as the global mining sector in play -- scratching their heads.

“I’m still trying to figure out, is this a savvy move or a desperate move?” said Scott Burns, a Morningstar analyst.

“I think it puts them in a win-win situation,” Burns added, noting Alcoa can cash in if the investment forces a higher BHP bid, but still have a stake in Rio if BHP’s bid falls apart.

Alcoa’s official line is the investment is a business decision that will improve shareholder value -- nothing more, nothing less.

But some on Wall Street seeking deeper meaning weren’t buying it. One source with knowledge of the Chinese side told Reuters that Alcoa approached the Chinese about two weeks ago.

Some think the deal allows Alcoa to curry favor with the Chinese by providing needed expertise and big-name cachet to smooth any political implications should Chinalco make a bid itself for Rio, the world’s number-two miner by market value.

In fact, Alcoa has substantial operations in China and last year sold its stake in Chinalco's Aluminum Corp of China Ltd (Chalco) 2600.HK for about $2 billion, a $1.8 billion gain on an investment it bought six years ago.


Other analysts see the Rio stake as a way to thwart the BHP-Rio deal, or at least drive up the price.

The move comes days before a regulatory deadline next Wednesday for BHP to make a firm offer for Rio or walk away. But Alcoa spokesman Kevin Lowery said no conclusions should be drawn from the timing of the announcement.

A source close to the deal said Alcoa would make a 13D filing with the Securities and Exchange Commission next week outlining how it might increase its stake in the entity it formed in Singapore with Chinalco to buy the Rio stake.

Alcoa’s stake in the entity is currently around 8 percent, the source told Reuters.

Alcoa’s stock rose 3.6 percent to $34.28 on Friday. The stock is well off its year high of $48.77 last July.

Charles Bradford, of Bradford Research/Soleil, sees little strategic value in the stake for Alcoa.

“What they are saying is: it’s just a loan from Alcoa ... to be converted to equity later,” he said. “It looks almost like you have a bid-ask spread now between what Rio wants, which is 4-1/4 shares, and what BHP is willing to offer, which is three shares.”

Bradford also speculated that Chinalco might only be partnering with Alcoa because they need Alcoa’s M&A experience. “There certainly is no love lost between Alcoa and Rio and they say they are not acting as a ‘white knight’.”

If part of Rio were to end up in Chinalco's hands, Alcoa could be in good position to pick off Alcan AL.TO assets that it coveted last year in its failed takeover of the Canadian aluminum producer that Rio ending up buying, according to Tony Robson, a mining analyst at BMO Capital Markets in Toronto.

Alcoa’s involvement doesn’t make sense, unless “everyone gets together and you split up Rio Tinto.

“And Alcoa is in there for some of the former Alcan assets. It has a seat at the table, albeit a small seat, relative to the Chinese government on one side and BHP Billiton on the other side,” Robson said.

Alcan’s hydro-electric powered smelters in Canada are widely considered the jewels in Alcan’s crown and were seen as the driver behind Alcoa’s bid last year.

Despite the speculation, Alcoa said revenge for losing out to Rio on Alcan did not come into it.

“It’s not about getting even,” Chairman and Chief Executive Officer Alain Belda told reporters in London. “It’s about business, it’s about economics, it’s about opportunities.

“This investment will diversify our economic exposure and is a testament to our strong faith in the future of the metals industry.”

Investors might see next week if Alcoa does indeed have deeper motives.


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