Alcan wins Pechiney, creating No. 1 aluminum seller

Alcan Inc., the second-largest publicly traded aluminum maker, won over the board of Pechiney SA with a takeover bid of as much as 4 billion euros ($4.5 billion), completing a two-month effort to become the industry leader.

Montreal-based Alcan offered 47.5 euros a share and an extra euro per share if 95 percent of Pechiney's shareholders accept, the companies said. Some investors in Paris-based Pechiney called the deal disappointing, even though it's higher than Alcan's offer of 41 euros in July and as much as 48 last month.

"Not only did Pechiney agree to a price which is much lower than the value of the company, most analysts agree Alcan could have paid more," said Michael Weinberger, managing director at York Capital Markets in New York. "There's a lot of value being created for Alcan shareholders, not a lot for Pechiney."

Lower production costs is where Alcan will get most of that value, BB&T Capital Markets Chief Economist Lloyd O'Carroll said. The new company would have had sales last year of $23.7 billion (about $37 billion), eclipsing industry leader Alcoa Inc. To hold a lead over Alcoa, Alcan Chief Executive Travis Engen still must try to lesson reliance on raw aluminum in favor of higher-margin packaging products, such as cans and foil, analysts said.

"Engen is biting off a lot here," said O'Carroll, who is also an aluminum analyst. "He's got to integrate company cultures making sure he moves forward with full cooperation. A lot of what you're buying is technical expertise. You have to make sure it stays there, not run off to Alcoa or retire."

Pechiney is the world's fourth-largest aluminum company and the second-biggest seller to the aerospace industry after Alcoa. It supplies half the aluminum components planemaker Airbus SAS uses, a quarter of Boeing Co.'s, and it controls 80 percent of the aluminum technology sales and assistance market. Waning air travel and demand for commercial jets has hurt both companies.

Alcan's shares rose 9.6 percent to $52.83 as of 4:07 p.m. on the Toronto Stock Exchange. Pechiney rose 39 cents to 46.65 euros in Paris. That values the company at 3.9 billion euros.

Pechiney shareholders will get 24.60 euros a share in cash and the rest in Alcan stock. Alcan can increase the cash portion depending on the value of its shares near the close of the offer.

"Such a new offer constitutes the best value alternatives available to Pechiney's shareholders," Pechiney said in a statement.

Pechiney's board had said Alcan's previous offers were too low. Investors also asked for a higher offer and drove Pechiney's shares higher in anticipation of a sweetened deal.

A combined Alcan and Pechiney would have 88,000 employees, compared with Alcoa's 127,000 workers. Alcan plans no job cuts after buying Pechiney and plans to make France the headquarters of its packaging business and its European primary aluminum business, Engen said in July. Nicole Fontaine, France's industry minister, said today Alcan agreed to stand by those plans.

Aluminum makers have been combining to help cut costs as global production reaches record levels. Aluminum prices have declined for three consecutive years on the London Metal Exchange. Alcan said in July that it expects to cut costs by $250 million within two years of a Pechiney combination.

"Based on a price of 50 euros a share, I expect Pechiney to add a nickel to Alcan's '04 earnings and 23 cents to earnings in '05," O'Carroll said. "At 48.5 euros a share, it will be a bit better than that." He rates Alcan stock a "strong buy" and doesn't own shares.

Alcan generates about 60 percent of its own electricity at its Canadian plants. With electricity about 40 percent of the cost in making aluminum, Alcan is considered by analysts to be the lowest-cost maker in the industry. Pechiney's more efficient smelting technology should lower costs further, they said.

This is the second time Alcan has tried to surpass Alcoa through a major acquisition. Engen's predecessor, Jacques Bougie, refused to sell a stake in an aluminum rolling mill, scuttling plans for a $9.2 billion three-way merger with Pechiney and Alusuisse Group in 1999. Alcan bought Alusuisse only.

The French government has approved Alcan's latest purchase attempt, and the European Commission is due to rule by Sept. 29. Alcan may give up control of two aluminum rolling mills that are part of a German joint venture with Norsk Hydro ASA.

European regulators opposed the 1999 agreement over concerns about concentration in the Western European beverage-can market.

Total asset sales for the latest deal are unlikely to exceed 4 percent to 5 percent of combined sales, Alcan has said.

Since taking the top spot at Alcan in 2001, Engen has expanded the company with at least six acquisitions, including Germany's VAW Packaging and an additional 20 percent stake in a Quebec smelter. Alcan management had only made three acquisitions prior to Engen becoming CEO.

Alcan and Alcoa have snapped up packaging businesses to win more of the $500 billion market and diversify its product lines. Alcoa bought Ivex Packaging Corp. last year for $790 million. Alcan, which makes candy wrappers for Nestle SA and foil liners for cigarette boxes, has also made acquisitions in Thailand.

Pechiney doesn't have a credit rating from Standard & Poor's or Moody's Investors Service. Alcan is rated A-, the fourth- lowest investment grade rating, by S&P. The rating company placed a negative outlook on Alcan's rating, meaning its is more inclined to cut, after it announced the initial bid for Pechiney because of concerns about its debt.

Alcan had about C$2.81 billion in debt as of last quarter, while Pechiney had 1.86 billion euros, based on Bloomberg data.

Pechiney is being advised by Goldman, Sachs & Co., J.P. Morgan Chase & Co., BNP Paribas SA and Rothschild & Cie. Alcan is being advised by Morgan Stanley and Lazard LLC.

The transaction helps maintain Goldman Sachs's top slot in the global merger rankings and J.P. Morgan's second place position, according to Bloomberg data. Morgan Stanley and Lazard are sixth and eighth respectively, while Rothschild and BNP don't make it into the top 10, according to Bloomberg data.