Alcan in Deal Talks to Fend Off Alcoa

KODE PPC ANDA

Canada's Alcan Inc (AL) has signed a confidentiality and standstill agreement with a so-called 'white knight' bidder that would rescue it from a hostile takeover bid from rival aluminum producer U.S. Alcoa Inc (AA).

In a July 9 filing with the U.S. Securities and Exchange Commission, Alcan said it is "continuing to have discussions and has undertaken negotiations concerning potential strategic transactions and alternatives to the Alcoa offer."

"In this regard, Alcan has also required that any intended recipient of Alcan's proprietary and confidential information, for the purposes of such discussions, enter into appropriate confidentiality and standstill agreements," the company added.

It didn't name the third party or parties involved, but analysts have been tipping diversified mining companies Rio Tinto PLC (RIO.LN) and BHP Billiton PLC (BHP) as the likely favorites. Both companies declined to comment on market speculation Wednesday, but an overnight report in Canada's Globe and Mail said Rio Tinto has emerged as the front-runner with BHP Billiton now said to be looking at Alcoa.

Although Alcan said in the filing that there's no assurance that its discussions will lead to agreement, it has made no secret of the fact it plans to fight the $27.93 billion Alcoa offer.

Alcan spokeswoman Chrystele Ivins reiterated that the Canadian company was "looking at all options."

Numis Securities analyst John Meyer said that a Rio Tinto-Alcan deal would provide a "significant fit between the two companies' aluminum smelting and refining operations," and would also provide "substantial benefits to the sharing of expertise, management and logistics."

But he noted that Rio Tinto would unlikely be interested in keeping Alcan's downstream operations. "It's not an area of expertise; the company has traditionally done well by continuing to be a leader in the mining industry in terms of technical ability and logistical capacity," he added.

And Credit Suisse analyst Jeremy Gray said that Rio Tinto needs a deal like Alcan. "Were base metals to stage a second rally, Rio Tinto is likely to underperform BHP and Xstrata because it cannot offer significant near-term growth in this space, unless they undertake a major M&A deal to fill the void," he added.

In a research note, Credit Suisse said if Rio Tinto acquired Alcan it would mark the company's first major buy in six years - in 2000 it agreed to pay $2 billion for Australian iron ore miner North Limited.

"Such a deal...would signal a clear change in strategy for the group that they are now prepared to releverage the balance sheet and go for growth both organically and through M&A," Credit Suisse said of Rio Tinto's reported Alcan move.

The bank added that Rio Tinto could boost its earnings by as much as 7% in 2008 by acquiring Alcan and increase its annual aluminium production to 4.2 million metric tons from 0.80 million tons currently.

"The rationale of such a deal could be to combine the strengths of Rio Tinto (bauxite and alumina) with Alcan's strength (aluminium)," Credit Suisse said.

Charles Kernot, analyst at Seymour Pierce, said Rio Tinto would be able to go into a potential deal with a private equity partner that would take on Alcan's downstream assets.

"There is a substantial amount of private equity capital available that needs to be used and spent. It is very definitely an opportunity for Rio Tinto to latch onto today that wasn't available some years ago," he said.

He noted that Rio Tinto has in the past purchased entire companies to acquire specific assets, as when it bought U.S.-based coal and gold miner Nerco, then sold off the gold business.

On Tuesday, Alcoa extended the offer to Aug. 10 to give regulators and shareholders more time to review its bid. It also said it entered into $30 billion senior unsecured multiple-draw term credit facility with a group of lenders, including Citigroup Global Markets Inc., which it may use to finance the cash portion of its Alcan offer.

As of 1100 GMT, Rio Tinto shares were trading down 0.1% at 3,903 pence a share.

KODE PPC ANDA