Alcan Recommends Rio Tinto Offer, Bidding War Not Over Yet

It's official. Rio Tinto (ASX:RIO) has made a AU$44.2 billion dollar offer for Canadian aluminium giant Alcan (NYSE:AL). The offer was all cash, which goes to show you just how good things have been in the mining business lately. Cash is certainly friendlier than the debt private equity comes a courting with. But is it a sensible offer for both parties?

Rio's offer-which Alcan's board has recommended shareholders accept- values the Canadian giant at US$101 per share. It's at 65% premium to Alcan's May 04th closing price of US$61.03, when Alcan first became a takeover target. The US shares were up nearly 10% on Wednesday to close at US$98.05.

Rio is confident that it's all cash offer is a better fit for Alcan shareholders than Alcoa's offer. Rio won't have to divest any other assets to avoid ant-trust complaints. And Rio's incoming CEO Tony Albanese says the deal begins paying back shareholders with earnings and cash flow in the very first year. Usually, CEOs talk about synergies between partners. It's a promising sign for shareholders that this deal is about something more concrete...cash.

So why buy aluminium assets now? "It's going to be all about China, then watch India," Albanese said. Pretty simple. There are 2.3 billion people in two markets. That's a lot of airplanes...and beer cans.

The takeover buzz in the mining industry is getting louder. Alcoa (NYSE:AA) may counter Rio's offer. And that's only if Alcoa isn't courted by BHP (ASX:BHP) first. Don't forget Swiss mining giant Xstrata (LON:XTA), either. With its penchant for flare, it may surprise everyone yet with an ambitious bid of its own. We'll see....

Dan Denning
The Daily Reckoning Australia

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