Alcoa Shares Leap on News Report of Possible Competing Bids
Alcoa is being targeted by two foreign mining giants that are preparing separate $40 billion takeover bids for the aluminum producer, a British newspaper reported, sending Alcoa shares higher even as some analysts questioned whether such a deal was likely.
BHP Billiton, the world's largest mining company, and Rio Tinto, the world's second largest iron ore producer, both based in Melbourne, Australia, are said to be considering offers, the Times of London reported in Tuesday's editions, citing unnamed sources.
Officials with the mining companies declined to comment on the report Tuesday, as did Alcoa spokesman Kevin Lowery.
'We don't comment on rumors and market speculation,' Lowery said. 'It's not prudent to do so, nor is it productive.'
Wall Street analyst Charles Bradford of Soleil-Bradford Research said he was skeptical of the Times report because 'neither BHP or Rio Tinto have shown any interest in the downstream area of the business.'
The downstream business refers to finished products manufactured from aluminum such as aerospace equipment and auto parts.
Earlier this week, India's Hindalco agreed to buy Canadian aluminum producer Novelis for $3.6 billion in a deal that Hindalco said will make it the world's largest rolled-aluminum products manufacturer.
Bradford said the Hindalco deal might be fueling speculation that Alcoa could be the next aluminum products supplier to be gobbled up.
'There may be a theory out there that BHP would buy Alcoa and sell off all its downstream businesses, but I don't know who that buyer would be,' Bradford said.
Bradford has revised his Alcoa earnings forecast up 15 cents to $3.20 a share for 2007, but said that was unrelated to the takeover speculation. Bradford on Tuesday downgraded Alcoa stock to 'hold' based on what he called the 'possibly erroneous' report in the Times.
The Times said takeover speculation was fueled by Alcoa's struggle to expand its business and a pending deal that would make Russia's OAO Rusal the world's largest aluminum producer, with about 12% of the global output of aluminum.
The newspaper said neither BHP Billiton nor Rio Tinto had approached Alcoa about making a bid, but that BHP Billiton has already done groundwork for a bid while Rio Tinto had not progressed as far.
Both companies recently reported company record earnings. BHP Billiton saw its net profit surge 41% to a $6.2 billion in the second half of last year, while Rio Tinto reported a profit for last year of $7.44 billion, up nearly 43%.
Although he saw no compelling reason for the takeovers, analyst Victor Lazarovici of BMO Capital Markets said it is not out of the question.
'I don't think it's wrong to assume they don't want (Alcoa's) downstream businesses,' Lazarovici said. 'The attraction would be the upstream assets, bauxite and alumina.'
The quickening consolidation in the metals industry has not occurred as much in the aluminum business, but that could change because, Lazarovici said, the 'sweet spot for consolidation has been the mid-cap companies in the $10 billion to $20 billion range.'
Alcoa was worth more than $28.5 billion as of Monday's close. Lazarovici said if some of its downstream businesses were jettisoned, the company would be a candidate for a takeover, although he added he does not see any compelling reason that Alcoa would be targeted.
'The reason aluminum companies haven't been targeted so far is the downstream issue,' Lazarovici said. 'The buyer would have to take the whole package and then take price and divestiture risks on the downstreams.'
'But I don't see the precipitating event to put these companies into play,' Lazarovici said. 'If there is one, it could be the expected retirement of (CEO) Alain Belda and the board looking at the recent performance of the company.