Alcan/Alcoa Merger: This One Won't Be Easy

Alcoa (AA) filed the initial S-4 for its proposed transaction with Alcan (AL) with the SEC on May 7. The current exchange offer expiration is July 10, 2007.

The document lists the following as regulatory requirements: HSR, Competition Canada, Investment Canada, EU, Australian Competition and Consumer Commission, Australian FIRB, as well as potential approvals necessary "other" non-U.S. jurisdictions.

Needless to say, each of these regulators will have a significant interest in this potential combination, particularly the DOJ and European Commission. That this case will draw an HSR second request and EU long-extension is a given. It will simply boil down to determining which niche aluminum segments will require remedies (also a virtual certainty) and how quickly the companies and the regulators can come to a divestiture agreement. Naturally, this assumes that the companies will eventually reach a formal agreement, or that Alcoa will succeed in its hostile takeover efforts.

Via the Rusal/Glencore/Sual combination completed last month, Alcoa is no longer the undisputed international aluminum/alumina producer. While this may ultimately bode well for a potential Alcan/Alcoa deal in terms of the long-term regulatory prospects, the fact remains that in the U.S., and less so in Europe, a combined Alcan/Alcoa will undeniably dominate some specific product markets -- particularly in aerospace applications. It is very likely within these product niches that any/all regulatory delays will occur.

The two charts below provide market share data for the Bauxite and Aluminum as of year-end 2004. Even factoring in the Rusal transaction, Alcoa would, through this acquisition clearly re-establish itself as the top player in the field, creating a significant amount of separation between all other competitors. There's simply no disputing this fact.

Thus, the key regulators will find it necessary to assess both the broad-market implications of the combination, as well as the niche market issues noted above. Add to this the fact that there has been very little change in the aluminum industry in the past several years leading up to this point, and the potential merger becomes even more significant from a regulatory perspective. In other words, the DOJ and EU have not had the occasion to look at this industry in quite some time. This could easily translate into very lengthy regulatory processes.

The registration statement does not specify filing dates for the various regulators. It can be assumed that Alcoa will begin submitting the required notifications before the end of this month, given that it has been planning the transaction for quite some time. Assuming the DOJ, EU, and Canadian notifications are filed before the end of May, review extensions can be anticipated in June, followed by at least four months of additional review periods. The DOJ review is likely to extend well into the fall, and probably into the winter, of this year.

On a non-regulatory note, several analytical reports have suggested a high possibility of a competing offer for Alcan from various third parties. At this time, while acknowledging that a third-party offer is possible, this publication does not see Alcoa backing away from its takeover attempt without a major fight. Alcoa simply has too much to gain if it can successful pull of this deal. What's more, Alcoa simply is not a company well-versed in major merger transactions and it is highly unlikely that a lesser, or equal, entity can dissuade it from its current goal of regaining the top spot in the aluminum industry.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.

Comments

[Mr. Finance]

Here is an excerpt from the May 7, 2007 post on the NewsVisual.com blog titled "Visual Map of Alcoa - Alcan's Deep Board Connections"

Alcoa's unsolicited bid for Alcan, probably involved a number of individuals who were or are deeply connected in the network of board of directors. The extend of the board interrelationships of these two organizations can be best represented by IntellectSpace's dynamic Knowledge Map (URL Below).

Most notable Board relationships between between Alcoa and Alcan include:

Alcoa - Henry Chacht - Warburg Pincus - Jeffrey Garten - Alcan
Alcoa - Franklin A Thomas - Citicorp/Citibank - H Onno Ruding - Alcan
Alcoa - Franklin A Thomas - Citicorp/Citibank - Lawrence E Fouraker - Alcan
Alcoa - Paul H O'Neill - GM - Guy Sait Pierre - Alcan
On an interactive Knowledge Map, to see the details (dates, titles, etc) of the board positions denoted by colored lines, just hover your mouse (granted that you are using Internet Explorer as your browser). To "drill down" into the details of the relationship, just double-click on a given relationship line.

An interactive version of the Knowledge Map can be found here (Internet Explorers only): fn.intellectspace.com/...