Alcoa offer to Reynolds gets hostile

No. 1 aluminum maker to take all-cash bid to shareholders

$65 offer is below market

Some say No. 3 maker is being coy, hoping bid will increase


Alcoa Inc., the world's largest aluminum producer, announced a $4.2 billion unsolicited all-cash bid yesterday for the rival Reynolds Metals Co., a day after Reynolds spurned Alcoa's friendly half-cash, half-stock offer.

To turn up the pressure, Alcoa also said it would take its hostile bid directly to Reynolds' shareholders and ask them to remove the company's board, which opposed Alcoa's first overture.

Alcoa's move comes as consolidation sweeps the global aluminum industry. On Wednesday, a two-continent, three-company deal was announced when Alcan Aluminium of Canada, Pechiney SA of France and Alusuisse Lonza Group AG of Switzerland agreed to a $17.6 billion merger. That deal would still leave Alcoa, based in Pittsburgh, in the No. 1 position globally.

The three-way global deal, however, left Reynolds, based in Richmond, Va., without a merger partner, and Alcoa swiftly moved the same day with its $65-a-share half-cash, half-stock offer for Reynolds. Yesterday, after the Reynolds board rejected that offer Sunday, Alcoa turned it into an all-cash deal. With the assumption of debt, the offer totals $5.8 billion.

This global mating dance is being brought on by global overcapacity and aluminum prices that have hit five-year lows.

In an exchange of news releases yesterday, the two companies staked out their positions: Alcoa said it preferred to negotiate a "mutually agreeable merger," rather than a hostile one and said the proposed union would not run afoul of antitrust laws because an Alcoa-Reynolds merger was "complementary" and "not anti-competitive."

Reynolds said Alcoa's offer was "designed to serve Alcoa's own interest and not the interests of Reynolds Metals share-holders. Shareholders need take no action at this time."

But in a battle between the two companies, some analysts expect that Alcoa could well prevail, that the antitrust issues would be minimal and that the posturing taking place right now is simply a negotiating strategy designed to come to a price both sides can live with.

"Reynolds seems willing to be a bride and, as a matter of fact, for some time has been looking for a groom," said Manford Mallory, an analyst with Research Capital Corp., a brokerage firm in Toronto. "This is the proverbial courtship response that you would expect. If Reynolds said anything else, you'd be surprised. It's like the bride saying that the diamond is too small."

The current merger wave appears to have been started by Alcoa when it bought Alumax Inc., the nation's No. 2 producer, last year and then proceeded to snap up aluminum producers in Spain, Italy and Hungary.

These moves increased Alcoa's market share and cut its costs, all of which stepped up the competitive pressures on other global producers.

Kurt Billick, an analyst with Warburg Dillon Read, said the three-way international deal was the "orphaning of Reynolds," increasing the need for the company to find a merger partner.

Billick does not view the Reynolds statement as an outright rejection:

"It's posturing by both sides. I think what's going on behind the scenes is that they are trying to come to some agreement. Reynolds knows it has to sell and Alcoa has to buy."

Shares of Reynolds fell 43.75 cents yesterday, to $68.9375, while those of Alcoa rose 37.5 cents, to $66.875. Last year, Reynolds had $5.9 billion in sales, compared with $15.4 billion for Alcoa.

Adding additional intrigue is the hovering by McCook Metals, owned by the Michigan Avenue Partners investment firm in Chicago, which wrote to Reynolds on Thursday expressing interest in buying the company.

That offer, however, did not contain a price, except to say that McCook would pay more than Alcoa. There was no indication of the source of McCook's financing for the deal.

"The biggest risk in this deal is that Reynolds shareholders reject a $65 bid because they want a bigger number," said John Tumazos, an analyst with Sanford C. Bernstein & Co. "And Reynolds' board rejects $65 as inadequate, and then there might not be another date for Reynolds at the big dance."

For Alcoa, the bid for Reynolds is seen as a can't-lose proposition: If Alcoa prevails, it will get aluminum assets at a relatively modest price that analysts say Alcoa can exploit through its considerable financial muscle and proven cost-cutting skills. And if the company does not get Reynolds, it would remain dominant in the industry.

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