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Rio Tinto offers $38.1B for Alcan

Deal would create the world's largest aluminum producer; all-cash offer exceeds Alcoa's spurned bid by 34 percent.

By Grace Wong, CNNMoney.com staff writer

LONDON (CNNMoney.com) -- Mining giant Rio Tinto has agreed to buy Alcan in a deal valued at $38.1 billion, a move that would create the world's largest aluminum producer and thwart Alcoa's hostile bid for the Canadian company.

Anglo-Australian firm Rio Tinto (Charts) and Alcan (Charts) announced the deal Thursday, saying Rio Tinto would pay $101 a share in cash, about a 13 percent premium to where Alcan shares closed Wednesday.

Shares of aluminum firms Alcan (yellow) and Alcoa (green) have shot up this year as investors have eyed consolidation in the sector.

The offer trumps the cash and stock bid Alcoa (Charts, Fortune 500) made in May for its smaller rival, valued at about $27.7 billion. That hostile bid was spurned by Alcan, which said the offer was too low and didn't adequately reflect the company's value.

The merger would be the biggest metals deal ever and comes amid record deal activity. The value of announced mergers worldwide has already hit $2.7 trillion in the first half of this year, according to Thomson Financial. And in the metals and mining sector, more deals have occurred so far in 2007 than ever before, when compared to the same period annually.

For months there has been speculation that mining giants Rio Tinto and BHP Billiton (Charts), sitting on loads of cash reaped from the commodities boom, would scoop up targets in the fast-growing aluminum sector.

Even mighty Alcoa, a Dow component and the biggest aluminum producer in the world before a three-way merger created Russian aluminum giant United Company Rusal earlier this year, has become a potential takeover target.

Alcoa's bid for Alcan was viewed by many as a defensive tactic to keep it from being bought and to counter growing competition, but the Rio Tinto offer raises uncertainty over its future, analysts said.

Shares of Alcoa jumped about 6 percent in New York as investors mulled the possibility of the company being put back into play. The gain, and the buyout news, gave a huge boost to the broader market, pushing the Dow industrials up about 290 points to a record high.

The Rio Tinto bid raises valuations for the aluminum sector and puts the takeover focus back on Alcoa, Charles Bradford, an analyst at Soleil-Bradford Research, said.

Although analysts suspected Alcoa could sweeten its offer for Alcan, it withdrew its bid late Thursday in light of Rio Tinto's announced agreement to purchase Alcan.

"Rio's offer for Alcan strongly reinforces our view of the underlying value in the aluminum industry and its bright prospects for the future," Alcoa Chairman and CEO Alain Belda said in a statement. "However, at this price level, we have more attractive options for delivering additional value to shareholders."

Belda said the company would resume its stock buyback program, which was put on hold while the offer for Alcan was open, to enhance returns to shareholders.

Alcan Chief Executive Dick Evans said that while the company explored a merger with Alcoa, it concluded that Rio Tinto was the best fit since it offered the most shareholder value and didn't pose as much regulatory risk.

"There is a lot of baggage in an Alcoa-Alcan transaction. At the end of the day...we chose Rio," he said during a presentation to analysts.

The merger will create a company, to be called Rio Tinto Alcan, that will be well positioned to take advantage of the booming demand for aluminum, driven by China and India, Alcan and Rio Tinto executives told analysts.

The prospect of strong global demand for aluminum, which is used in everything from airplanes to cars, has sparked talk of consolidation in the sector and helped lift aluminum shares.

Alcan's stock has already climbed about 85 percent so far this year, which has raised some concerns that companies like Rio Tinto may be overpaying.

But Rio Tinto Chief Financial Officer Guy Elliott said the company is on solid financial footing and said the Alcan acquisition should add to earnings within the first full year of consolidation.

The new company would be based in Montreal and led by Evans. As part of the deal, Alcan would sell its packaging business.

Both companies have recommended that their shareholders approve the deal, which is expected to close in the fourth quarter. Top of page