Rio Tinto said Thursday it will offer about $38 billion in cash for Alcan, with support of the Canadian aluminum producer's board, trumping a hostile offer from U.S. aluminum giant Alcoa.
Alcan CEO Dick Evans would run the merged company, to be called Rio Tinto Alcan. The deal would create the world's largest aluminium producer.
Rio Tinto offered $101 a share for Alcan , a 12.7% premium over Alcan's closing price on Wednesday. It also plans to sell Alcan's packaging division once the deal goes through, forecasting cost savings of about $600 million a year.
Rio Tinto is offering a "compelling price" and expects its offer will be the winning bid, Rio Tinto Finance Director Guy Elliott told "Worldwide Exchange."
"(Alcan) is a very high-quality company, absolutely in keeping with Rio Tinto's strategy, which is to focus on high-quality assets with long lives ahead of the them and obtaining value for our shareholders and I'm quite convinced that this offer is going to win that prize and do all of those things," Elliott said.
The merger will be fully financed by debt, but the sale of Alcan's packaging unit and a further review of the combined company would help pay down liabilities, he added.
More Deals on the Way?
Rio Tinto's Offer is also likely to promote more consolidation in the mining sector, with speculation that Anglo-Australian miner BHP Billiton would turn its attention to a bid for Alcoa.
"Given that Rio is making a bid at this point in the cycle, it's really a vote of confidence that the cycle is going to last for some time," Ted Leschke, an analyst at Shaw Stockbroking, told Reuters. "That is going to put the rocket under a number of leading resource stocks, not just Rio, not just Alcan, but all the majors. Rio's known for being very careful with their money and with their script when taking over companies."
Alcoa made an unsolicited cash-and-stock offer for Alcan on May 7, worth about $28.8 billion based on the Dow components latest closing price. Alcan has repeatedly rejected Alcoa's offer as inadequate.
Alcan had declined to enter talks with Alcoa, in part because it says the U.S. firm refused to sign a confidentiality and standstill agreement during friendly talks that collapsed last year.
This week Alcoa extended its offer for Alcan to Aug. 10. It also signed a $30 billion line of credit from Goldman Sachs and Citigroup, which are advising it on the offer.
The merged company would be headquartered in Montreal.
Shares of Alcan jumped 12.8% in Paris trading, unsurprisingly, while Rio Tinto fell 2.9% in London trading. Also in London, BHP Billiton rose 0.7%, while Alcoa climbed 5% in Frankfurt.