In a quick denouement to an eight-day-old takeover battle, Richmond-based Reynolds Metals yesterday agreed to be bought by industry giant Alcoa Inc. for $4.4 billion in stock, or $70.89 a share--about $300 million more than it offered a week ago. Alcoa would also assume $1.5 billion in debt.
Pittsburgh-based Alcoa first announced its bid for Reynolds within hours of its Montreal-based competitor Alcan Aluminium's announcement of plans to buy French company Pechiney and the aluminum and packaging business of Switzerland-based Algroup for $9.2 billion.
If the merger between the largest and third-largest North American aluminum companies takes place, the new operation would have annual revenue of $20.5 billion, just shy of the $21.6 billion of the Alcan-Pechiney-Algroup combine. But the new U.S. company would have bigger aluminum operations than its overseas competitor.
The sudden urge to merge in the aluminum industry is the result of stagnant metal prices--just as the plunge in oil prices last year led several oil giants to combine forces.
For about a decade now, the aluminum industry has been beset with low prices and weak demand. As long as the Soviet Union was one country, its huge aluminum capacity flowed into defense production. But the subsequent breakup and erosion of economic wealth forced the Commonwealth of Independent States to sell aluminum overseas for much-needed dollars.
The U.S. recession of the early 1990s and the more recent collapse of Asia's "miracle" economies only added to the industry's woes.
That's despite the fact that there are just six big players in the North American aluminum market--which together accounted for 16.4 percent of world production in 1998.
Along with the others, they have suffered as primary aluminum prices--as measured by the London Metal Exchange--spiraled down from an average of 73 cents a pound in 1997 to 54 cents in the first quarter of this year.
Standard & Poor's recently reported that the five largest companies in the industry lost $376.4 million in operating profits and $1 billion in revenue during the first quarter.
The planned merger, however, should help the companies reduce costs.
In the case of Alcoa, the expected efficiency savings are about $200 million two years after the merger. This will be in addition to Alcoa's $1.1 billion cost-reduction program, which ends in 2001.
With Reynolds in the fold, Alcoa would have a more balanced product portfolio. About a quarter of its revenue would come from consumer business, 28 percent from construction and distribution, 27 percent from aluminum and alumina, and 21 percent from transportation.
On Sunday, Reynolds's board of directors rejected Alcoa's previous offer of $65 a share in cash and stock as inadequate. Reynolds had also received an offer from Chicago investment firm Michigan Avenue Partners, which did not disclose the value of its bid but said it was higher than Alcoa's.
Michigan Avenue Partners Chairman Michael W. Lynch could not be reached for comment.
Reynolds's chairman and chief executive, Jeremiah J. Sheehan, said the new offer appealed to his shareholders because of the force Alcoa represents, and "the shareholders would have the opportunity to ride up the Alcoa share."
Reynolds has a 30-day "open-shopping" period, during which it is free to negotiate a better deal. But Vahid Fathi, mining and metals analyst at ABN Amro, said: "This is in line with our valuation of Reynolds."
Alcoa will exchange 1.06 shares for every share of Reynolds. The final price is a 3.87 percent premium over Reynolds's Wednesday closing share price of $68.25. Reynolds stock fell $2.68 3/4 yesterday, to $65.56 1/4, reflecting Wall Street's disappointment that the merger fight ended so quickly.
Alcoa's stock closed at $65.18 3/4, down $1.68 3/4, but analysts dismissed the fall as a knee-jerk reaction to the announcement. "This deal is good for Alcoa," said Fathi.
"We believe the transaction to be very accretive to Alcoa's earnings per share" in the first year following the completion of the transaction, said Alain P. Belda, president and chief executive of Alcoa. He added that Alcoa expects to reach revenue of $30 billion in another four to five years.
But Alcoa, which initiated merger discussions with Reynolds on March 22, will likely attract an antitrust probe. In late 1997, Alcoa had to scuttle its bid to buy just one of Reynolds's plants after the Justice Department moved in to block the deal.
Belda, however, did not expect the department to stall the transaction this time. "We believe this [merger] is pro-competition and pro-customer," Belda said.
If the Alcan-Pechiney-Algroup merger gets the nod from the European Union regulators, Alcoa's move might be viewed in a more sympathetic light. "[That] would make it easier for Alcoa to make its case," said Leo Larkin, mining and metals analyst at S&P Equity Group.
Key Events in The Aluminum Bidding Wars
Aug. 10: Alcan Aluminium of Montreal agrees to buy Paris-based Pechiney and Zurich-based Algroup for $9.2 billion. Hours later, Alcoa makes an unsolicited bid for Reynolds Aluminum.
Aug. 15: Reynolds rejects Alcoa's offer as inadequate.
Aug. 16: Alcoa makes a hostile bid of $5.6 billion for Reynolds Metals.
Yesterday: Reynolds Metals agrees to be acquired by Alcoa after Alcoa sweetens its offer.
1998 revenue: $5.9 billion
1998 earnings: $66.0 million
Yesterday's closing stock price: $65.561/4, down $2.683/4 (ticker RLM on the NYSE)
1998 revenue: $15.3 billion
1998 earnings: $853 million
Yesterday's closing stock price: $65.183/4, down $1.683/4 (ticker AA on the NYSE)
SOURCES: The companies, Bloomberg News, Hoover's