Rio Tinto''s Alcan acquisition turns spotlight on Alcoa falling to BHP Billiton

13 July 2007

As the market digests Rio Tinto''s $38-billion takeover of Alcan, focus is starting to turn to failed rival bidder Alcoa and its Australian joint venture partner Alumina, and what role BHP Billiton might play in their futures, reports the The Australian in its business section.(See: Update: Alcan to merge with Rio Tinto under $38.1 billion deal)

Analysts have labelled Rio Tinto''s purchase of the Canadian aluminium producer Alcan,'' a good fit'', For one it would create long-term value for Rio, given the assets owned by Alcan, the operational synergies and the positive outlook for the aluminium sector in the longer-term.

Moreover, the merger catapults Rio Tinto''s aluminium operations from being mid-scale and a geographically skewed into the largest producer of aluminium in the world, eclipsing Russia''s UC Rusal , which in a three-way merger between Russian firms Rusal, Sual and Swiss company Glencore last October, had left Alcoa as the world''s second largest aluminium producer.

But nervousness over the $38.1-billion price pushed Rio Tinto''s shares down in both the Australian and London; in early trades, its shares were lower 1.8 per cent, at $101.95, after falling a steeper 4.6 per cent on the London Stock Exchange.

Moreover, international ratings agency Fitch Ratings has put Rio Tinto on rating watch negative as Rio Tinto would become highly leveraged after paying for Alcan. Fitch, however, acknowleged, "Rio Tinto has, however, indicated several measures that could be used to reduce acquisition debt, including the sale of the Alcan packaging operations and the potential sale of some of Rio Tinto''s smaller-scale operations, following a portfolio review to take place in the coming months."

Alcan''s packaging business is estimated at $6 billion, while its engineered products business, which Rio could sell at a later date, is worth another $6 billion.