Reynolds gets offer from Alcoa

Unsolicited bid is cash and stock totaling $5.6 billion

Antitrust scrutiny looms

Move is launched hours after Alcan's European deal

August 12, 1999|By BLOOMBERG NEWS

PITTSBURGH -- Alcoa Inc. offered to buy Reynolds Metals Co. yesterday for $5.6 billion in cash and stock, a move spurred by rival Alcan Aluminium Ltd.'s effort to supplant Alcoa as the world's biggest aluminum producer.

"This could be the beginning of a radical realignment in the industry," said Jim Southwood, president of Pittsburgh-based investment adviser Commodity Metals Management Co.

Alcoa's unsolicited bid came hours after Alcan said it would buy French competitor Pechiney SA and the aluminum and packaging units of Zurich-based Algroup for $9.2 billion in stock. The transactions may draw tough antitrust scrutiny that still could leave Alcoa as No. 1. Regulators could reject both proposals or allow Alcoa to buy Reynolds.

"For anyone who is worried about the antitrust situation of the Alcan-Pechiney-Algroup deal, this is going to catapult Alcoa back up to the No. 1 slot," said Paribas analyst Charles Kernot.

Sagging commodity prices have led raw-materials producers in a number of industries to combine so they can increase profit by cutting costs. Aluminum makers are now doing the same as prices rebound from a five-year low in March. As big producers merge, smaller ones such as Reynolds and Kaiser Aluminum Corp. need partners to stay competitive.

Richmond, Va.-based Reynolds declined to comment.

Both Reynolds and Houston-based Kaiser Aluminum Corp., the No. 3 U.S. producer, have seen their earnings cut by falling aluminum prices. The rush to combine may collide with regulators. Alcoa has a storied history with U.S. antitrust enforcers, who succeeded in having the courts declare the aluminum maker a monopoly in 1945.

After World War II, the company was ordered to sell a number of plants to competitors as well as to Alcan, until then the company's Canadian operation.

Last year, Alcoa agreed to sell cast-plate plants to win Justice Department approval of its $3.8 billion purchase of Alumax Inc. The two companies would have controlled 90 percent of U.S. cast-plate production.

U.S. antitrust enforcers may be tougher this time around, said Steven Newborn, an antitrust lawyer at Rogers & Wells.

"This deal has serious problems" Newborn said. "The problem is going to be where Reynolds and Alcoa have been working with various customers for specialty aluminum products and that customer does not believe that there is a substitute" from another supplier except China or Russia.

Reynolds stock rose $9.375 to $65.25. Alcoa rose $2.9375 to $69.375.

"This is significantly undervaluing [Reynolds]," said ABN Amro analyst Vahid Fathi. "In the heat of consolidation, you cannot rule out other potential bidders for Reynolds."

Yet Alcoa reduced the chance of a competing bid by making its move after the Alcan transaction was announced. The Alcan-led group of companies likely won't make a bid for another producer while their combination is under regulatory review.

Alcoa and Reynolds employ more than 123,000 people worldwide, with a combined $21 billion in sales last year. To trim costs at Reynolds, whose sales have declined for the past four years, Alcoa likely will eliminate about 10 percent of Reynolds' 20,000 workers, said Andersen Consulting associate partner Lou Pahountis.

"There's no question that there's going to be jobs lost," said Pittsburgh-based Pahountis. "You've got to be the low-cost producer while controlling the markets you serve."

Montreal-based Alcan said it expects to reduce annual costs by $600 million and slash 5 percent of its work force of about 100,000.

Alcoa said it would pay cash for half of the Reynolds shares and stock for the rest, at a price of $65 each share.

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