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13. February 2007

Alcoa may be next target

in global aluminium consolidation

After the steel industry, which has seen a series of large mergers and acquisitions in recent years, it is now the turn of the aluminium industry to consolidate. Following the acquisition of Novelis by Hindalco over the last weekend, there are now reports that the world's largest aluminium producer Alcoa itself may be an acquisition target.

The Times of London has reported that Anglo-Australian mining groups BHP Billiton and Rio Tinto are both independently evaluating possible bids for acquiring Alcoa. The deal size would be as high $40 billion, but neither company is understood to have approached the Alcoa board so far with a proposal.

US-based Alcoa is the leading producer of primary aluminium and aluminium products with 2006 revenues of $30.4 billion. The company has presence in 44 countries with a workforce of 123,000. Only about 20 per cent of total revenues were from primary aluminium and around 9 per cent from alumina while the balance came from flat rolled and other value added products.

Alcoa and Canadian company Alcan have dominated the aluminium industry for many years, but have come under pressure from Russian manufacturers recently. Russian company RUSAL is planning to invest $8 billion over the next eight years to emerge as the largest producer of primary aluminium globally. SUAL, the second largest Russian aluminium producer, also has substantial plans to expand capacity.

BHP Billiton and Rio Tinto have well diversified product portfolios including iron ore, copper, coal, energy and aluminium. Both BHP Billiton and Rio Tinto have extensive aluminium operations and are already among the top-10 producers globally. BHP currently produces around 1.3-million tonnes of aluminium annually while Rio Tinto produces 1.2-million tonnes. Acquiring Alcoa would help them to expand their product range to more value added aluminium products and provide access to large customers in mature markets. Both companies are very cash rich, thanks to record metal and ore prices in recent years, and would have no difficulty in funding large buyouts.

After the report of a possible acquisition bid, Alcoa stock surged 9.33 per cent to $35.97 per share in after hours trading in New York yesterday. The company has a current market capitalisation of over $28.5 billion and trades at an earnings multiple of close to 13.

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