Alcoa stalks Alcan

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Is aluminium the new steel? After the deal frenzy in steel stole the spotlight last year, this year’s star turn looks as if it will be aluminium, judging by the market’s reaction to Alcoa’s unsolicited bid for Alcan.

The logic for such a deal is clear. There is increased competition globally: China, India and Russia are all piling in. The combined group would bring together Alcoa’s advantages in alumina operations and Alcan’s low-cost aluminium smelting, thanks to energy from hydro sources.

The synergies also look achievable, at just more than 4 per cent of Alcan’s revenues, and could be overly conservative. Shaving $200m, or less than 1 per cent, off the huge combined procurement bill, for instance, looks more like a starting point than the endgame, which would help to push up the deal’s return of about 9 per cent after tax. And Alcoa’s record on delivering is good.

There is, of course, more risk to this deal than pure execution. After the big rise in aluminium prices over the past few years, there is mounting concern that conditions look less benign, with the outlook clouded by expanding production in China.

But before Alcoa’s investors waste too much time worrying about whether this is the right moment for their company to consolidate, they should consider the market’s reaction. Alcoa’s shares barely looked back as news broke of the deal on Monday, rising more than 5 per cent. This is not the usual response for a massive hostile cash-heavy bid. Alcoa itself looks likely to become a target, with recent speculation focusing on diversified miners BHP Billiton and Rio Tinto as the obvious suspects. Alcoa would not be a straightforward target, given a joint venture in the upstream business that could prove tricky to get round. Still, Alcoa’s pitch for Alcan has the feel of the first shot in what will probably be this year’s long-running commodity saga.

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