Alcoa's top spot had looked threatened by last week's announcement that its closest rival, Alcan of Canada, would merge with France's Pechiney and Switzerland's Alusuisse-Lonza. The three companieshad combined sales of $20bn in 1998, compared with Alcoa's $15.5bn and Reynolds' $5.9bn.
Alcoa will exchange 1.06 of its shares for each share of Reynolds, the world's third-largest aluminium company and maker of Reynolds foil wrap, valuing each Reynolds share at $70.89. Alcoa will also assume $1.4bn in debt.
"It's good for the shareholders and good for the aluminium industry in that there will be a stronger industry that will ultimately survive," said Victor Lazarovici, an analyst with Nesbitt Burns. "It will be more profitable."
Earlier this week, Alcoa said it would launch a hostile cash offer to acquire Reynolds at a price of $65 a share after the smaller company's shareholders rejected a friendly deal proposed by Alcoa just hours after the Alcan announcement.
Reynolds would not comment directly on its turnaround decision to accept a merger with Alcoa, but Jeremiah Sheehan, the company's chairman and chief executive officer, said: "Our employees will benefit from being part of a company with the size and resources that are increasingly important to compete in a consolidating industry." Mr Sheehan plans to leave the company once the merger with Alcoa is complete.
Alain Belda, Alcoa's president and chief executive, said: "We are pleased to have negotiated an agreement with Reynolds that is consistent with the goals we established when we announced this strategic initiative a week ago."
Mr Belda said that the merged company would make $200m in pre-tax cost and efficiency savings over the next two years in addition to Alcoa's existing $1.1bn cost-cutting programme. Analysts predict that 10 per cent of Reynolds' 20,000 workers will lose their jobs if the deal goes through. Alcoa's offer has been approved by the board of directors of both companies, but is still subject to approval of both Reynolds' shareholders and regulatory bodies.
Reynolds has 30 days to pursue other offers, but would be subject to a $100m break-up fee.