Alcan's £3bn Pechiney bid reshapes world of aluminium

Four years after failed merger, Canadians renew attempt to become world number one
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Alcan of Canada renewed its attempt to create the world's biggest aluminium and packaging group yesterday by launching a hostile bid for its French rival Pechiney, valuing the company at €4.8bn (£3.26bn).

The takeover, if successful, would enable the Montreal-based Alcan to leapfrog Alcoa of the US as the world's number one aluminium company by sales, although it would still remain in second place based on market capitalisation and tonnage produced.

The combined group would have a market value of $13.5bn, sales of $24bn a year, 88,000 employees, operations in 50 countries and output of 3.2 million tonnes, giving it 12 per cent of the primary aluminium smelting market.

Alcan's cash and shares-offer values Pechiney at €41 a share or €3.4bn - a 20 per cent premium to its closing price last Wednesday. Alcan would also take on €1.4bn of Pechiney debt.

This is the second time in four years that the Canadian company has tried to propel itself into number one position. In 1999 a three-way merger between Alcan, Pechiney and Switzerland's Alusuisse-Lonza failed after it was blocked by European Commission competition authorities.

In order for this deal to succeed, Alcan will have to persuade not just Brussels of its merits but also the stock market and French political and public opinion.

A hostile bid for a French company on this scale is unprecedented and job losses are inevitable. Although Alcan would not spell out the scale of the cutbacks, it said that the takeover would produce savings of $250m a year, almost a third of which will come from getting rid of overlapping corporate, head office, sales and distribution staff.

Pechiney said that it was "astonished at the unfriendly nature" of Alcan's bid, adding that it "significantly undervalues" the group. The French cannot, however, say they were not forewarned. Travis Engen, the chief executive of Alcan, met his counterpart at Pechiney, Jean-Pierre Rodier, for face to face talks in Paris last Friday and Saturday in a failed attempt to get the backing of the Pechiney board for its offer. Mr Engen said yesterday that he preferred to think of the offer as "friendly but unsolicited".

Alcan also disclosed that it had begun discussions with competition authorities about the asset disposals that would be necessary in order to gain approval from Brussels. Alcan said that it was prepared to sell one of two big rolling mills in Europe that the combined company would own and some smaller aerosol can and aluminium cartridge businesses. In total these assets would account for 5 per cent or $1.2bn of combined revenues.

Mr Engen said that since the failed merger in 1999 the industrial landscape had changed significantly. Prices had fallen, demand from the aerospace industry had weakened, the euro had increased in value against the dollar and aluminium producers were now dealing with a smaller number of bigger customers.

In addition, Alcan has carried out several acquisitions of its own. In October 2000 it succeeded in buying Alusuisse-Lonza and more recently it has bought stakes in an alumina refinery, an aluminium smelter and a packaging business run by rival aluminium producers.

Alcan's series of takeovers mirror deals elsewhere in the industry. Last year Norsk Hydro paid €3.1bn for the aluminium business of Eon's VAW while Alcoa bought Reynolds Metals for $5.8bn in 2000.

A takeover of Pechiney would strengthen Alcan's presence in the aerospace market where the French group supplies about half the aluminium used by Airbus Industrie and a quarter of Boeing's needs.

In packaging, the combined group would become the biggest supplier to the pharmaceutical and food industries and the second biggest supplier to tobacco firms. The merger would also balance Alcan's portfolio nicely. Two-thirds of its packaging sales are in the US and one third are in Europe. The ratio is the other way around for Pechiney.

As for production of alumina, the raw material from which aluminium is smelted, the takeover would double Alcan's stake in Queensland Alumina, the world's biggest producer, to 40 per cent.

To sugar the pill for the French, Alcan has promised that Paris will become the global headquarters of its packaging business and also the headquarters for its European aluminium business. Mr Engen also said that Alcan did not plan any "large-scale closure of production facilities" suggesting that job losses among blue-collar staff will be limited.

Pechiney has missed out on the wave of mergers in the aluminium industry since 1999 and failed to complete its €750m purchase of Corus' aluminium division earlier this year after the deal was blocked by the steel company's Dutch supervisory board.

Industry analysts therefore believe it would be open to a takeover if the price were right. There is also the prospect of a rival offer with analysts pointing to Norsk Hydro and Anglo-American. "We think the price is fair but you could expect another bidder to come in and bid higher than this," said Daniel Major of JP Morgan.

Alcan's Mr Engen himself acknowledged the possibility of an auction developing. "We know that Pechiney will examine its options. For instance, we could think of a white knight," he told a Paris press conference yesterday. Pechiney shares closed €8 or 24 per cent higher last night at €42 - one euro above Alcan's offer price.

But it is still most likely to be Brussels where the fate of the deal is finally settled. Competition lawyers said that Alcan was likely to have been in discussions about possible remedies with the Commission's mergers task force for at least a month before yesterday's announcement. Alcan said that it expected clearance for the deal from all US, Canadian and European regulators by late September or early October.

This indicates that it does not expect Brussels to order a full inquiry into the deal, which would last at least five months. From receipt of the merger notification, the mergers task force has three to six weeks to carry out a phase one investigation of the deal. At that point it can either approve the merger or order a phase two inquiry lasting a further four months.

Based on the concerns voiced by the Commission in 1999, Alcan believes it will be enough to sell either the AluNorf rolling mill, which it owns with Norsk Hydro, or Pechiney's Neuf-Brisach mill along with some smaller can and cartridge businesses.

Competition lawyers are more circumspect. Mat Hughes, director of economics at Ashurst Morris Crisp, said it was possible that the Commission had already provided confidential guidance indicating that the disposals proposed by Alcan would be adequate. But he added: "If the remedies are that clear cut, then why didn't Alcan offer them up last time around? If this inquiry goes to a second phase than I would expect the Commission to seek additional undertakings."

Mr Hughes also pointed out that, unlike the 1999 merger, this was a hostile bid and therefore Alcan would be alone in trying to persuade the Commission that its disposals go far enough. "It is not strictly a regulatory issue but it is helpful when everyone is singing from the same hymn sheet," he said.

Alcan does not have very long to find out whether its prayers have been answered.