Alcoa Deal Or No Deal
America’s Dominant Aluminum Producer Targets World Alumina Markets
Will Alcoa deal for rival aluminum giant Alcan or walk away to focus on its own global operations?
Headquartered in New York, Alcoa Inc. is the world’s biggest aluminum producer. Alcoa’s revenues soared by 18.8% in 2006 to a record US $30.4 billion.
Aluminum prices continue to rise from surging metal demand particularly from the aerospace, construction and commercial transportation markets.
Alcoa has 123,000 employees, almost twice as many as Alcan. However, Alcan’s global footprint is larger with operations in 61 countries compared to 44 for Alcoa. As well, Alcan international revenues are much higher than Alcoa’s.
2006 Alcoa Revenues by Purchasing Country
Alcoa’s latest annual report shows that over 56% of company revenues originate from sales in America.
- U.S. … US$17.1 billion (56.5% of 2006 total company revenues, up 14.9% from 2005)
- Australia … $3.2 billion (10.4%, up 28.2%)
- Spain … $1.8 billion (5.9%, up 25%)
- Hungary … $1.2 billion (3.8%, up 34.3%)
- Brazil … $1.1 billion (3.6%, up 38.9%)
- United Kingdom … $956 million (3.1%, up 7.8%)
- Germany… $768 million (2.5%, down 1.4%).
The first three countries above account for 72.8% of Alcoa’s total sales. which are more geographically concentrated than Alcan’s international revenues. By acquiring Alcan, Alcoa would become a more diversified global competitor.
China, Packaging & Primary Aluminum
Alcan is also an attractive acquisition because of the company’s stronger presence in China, where aluminum consumption is growing at an annual rate of 17% - the fastest rate of any country in the world. In contrast, Alcoa’s aluminum sales in America are slowing because of flattening demand for automobiles and housing.
Another factor that enhances Alcan’s value as a takeover target is the fact that Alcan’s lucrative packaging operations produced US$6.4 billion in 2006 revenues (27% of total Alcan revenues) – twice as much as Alcoa’s packaging business group. According to Alcan’s annual report, foil packaging is one of the most powerful factors driving year-over-year growth in global aluminum consumption.
Primary aluminum (raw, non-recycled alumina) represents the most profitable part of the global aluminum business. Alcan’s mines and smelters produced an estimated US$8.4 billion worth of primary aluminum in 2006, more than double the comparable figure for Alcoa.
Alcoa-Alcan Deal Risks
Just as contestants on the television gameshow Deal or No Deal have to cope with tough counteroffers from the crafty Banker, Alcoa’s proposed US$33 billion takeover bid has many hurdles to overcome.
First, Alcan has signed a long-term agreement with Hydro-Quebec to buy 3 billion kilowatts of electrical energy annually at competitive prices. An additional 2 billion kilowatts will become effective in 2010. According to Laura Mandaro of MarketWatch, the bad news is that the Quebec government can cancel the electricity-supply contracts if Alcoa’s merger fails to obtain written approval from both Alcan and La Belle Province.
Another risk is that the Canadian public may rebel against yet another foreign takeover of a Canadian company. David Olive of the Toronto Star writes in his May 8 article Another big bite out of Canada that since the start of 2006, foreign companies have assimilated 600 Canadian firms. Three weeks ago, former Canadian Prime Minister John Turner attended a University of Toronto movie premier intended to focus public awareness on the harm that foreign ownership can do to Canada’s economic sovereignty.
Thirdly, Alcoa’s proposed merger with Alcan must survive a gauntlet of foreign investment and antitrust challenges.
Finally, Toronto Star business reporter Lisa Wright expects international mining giants like London-based BHP Billiton or Rio Tinto to emerge as rival bidders for Alcan – or even bid for Alcoa itself.
Alcoa’s merger gambit may well lead to a No Deal ... or have a surprise ending that will leave even the cold-hearted Banker scratching his head.
