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Alcoa wraps up Reynolds
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August 19, 1999: 7:07 p.m. ET
Acceptance of $5.8B offer may not end battle for No. 3 aluminum maker
By Staff Writers Jamey Keaten and M. Corey Goldman
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NEW YORK (CNNfn) - Alcoa Inc. Thursday won the battle to acquire Reynolds Metals Co. for $5.8 billion in stock and debt, but the war may be far from over.
Before the ink even had time to dry on Alcoa and Reynolds' $70.89-a-share agreement, McCook Metals LLC, a subsidiary owned by Chicago-based investment firm Michigan Avenue Partners, announced its intentions to top the bid with its own all-cash offer.
McCook's announcement ensures the ongoing battle for Reynolds - and Alcoa's bid to remain the top aluminum producer in the world - forges on. Under terms of Alcoa-Reynolds agreement, Reynolds has 30 days to sever its accord with Alcoa if it opts to seek or be sought by another partner.
"We are going to fight this tooth and nail," McCook Metals' Chairman Michael Lynch told CNNfn.com. "This is far from being done. We have been waiting for the right time to make our tender offer and we will do so in the next 30 days."
Battle forges on
The Alcoa-Reynolds agreement comes just four days after Reynolds rejected a $65-per-share cash-and-stock bid by Alcoa. Reynolds, even in spurning the prior bid, said it wanted to craft a deal on friendly terms. Alcoa, for its part, said it wanted to hammer out an amicable deal - despite making a revised, hostile offer Monday that was all cash.
Other suitors had mulled bids for Reynolds too - including rival Alcan Aluminum of Canada, the world's No. 2 producer, which last week inked its own multibillion-dollar merger. But Alcan Tuesday said it did not plan to mount its own Reynolds bid.
While one sector analyst said the accord makes sense, Wall Street overall was decidedly unkind to the deal makers. Shares of Pittsburgh-based Alcoa (AA), one of the 30 Dow industrial stocks, shed 1-11/16 to 65-3/16. Richmond, Va.-based Reynolds (RLM) closed down 2-11/16 at 65-9/16.
The offer comes at a 27-percent premium on the closing price of Reynolds before Alcoa first unveiled its $65-a-share offer. Many analysts had expected Reynolds to sell in the mid-$70's.
"This is a very equitable deal for both sides," said Clarence Morrison, a Prudential Securities analyst. "I was not surprised at the price. I had been valuing Reynolds around that level for some time."
And Alcoa seemed pleased with its catch.
Rife with questions
"We are pleased to have reached a negotiated agreement with Reynolds that is consistent with the goals we established when we announced this strategic initiative just over a week ago," said Alain J. P. Belda, Alcoa's president and CEO.
But questions were rife about why Reynolds, the well-known maker of Reynolds Wrap aluminum foil, had such a quick change of heart about the Alcoa bid -- prompting much second-guessing by shareholders.
"For our shareholders, [the deal] will be an opportunity to ride the Alcoa share price up over time," said Jeremiah Sheehan, Reynolds' chairman, when asked during a conference call why Reynolds turned down the $65-a-share offer but bit on the $70-per-share cash and stock offer. "It seemed like a fair and equitable deal for our shareholders."
Few shareholders expressed enthusiasm for the deal, particularly Reynolds' largest shareholder Highfields Capital Management.
Scathing condemnation
In a scathing letter fired off to Reynolds' management, managing director Richard Grubman accused the company of accepting a cut-rate offer, suggesting they "effectively lied to the shareholders by not disclosing Alcoa's first written proposal in March." Recent regulatory filings show that Highfields owns about 6 percent of Reynolds.
Highfields, also of Richmond, said Alcoa originally offered an exchange rate of 1.42 shares of stock for Reynolds -- and accused the board of not seeking the best offer possible.
Grubman also said the new Alcoa offer, on an options-adjusted basis, was worth less than the previous $65-per share all-cash bid. "It is hard, if not impossible, to imagine how we could have done worse," he wrote.
Reynolds declined comment on the letter.
Alcoa unveiled its first offer on Aug. 11, less than a day after Canada's Alcan (AL), France's Pechiney (PY) and Algroup of Switzerland announced a $9.5 billion merger to create a company in a neck-and-neck race for industry leadership with Alcoa.
Strange twist of fate
What resulted from then was an usual chain of events that led to a second, all-cash bid from Alcoa, a competing bid from McCook enshrouded in ambiguity and a growing number of Reynolds shareholders convinced that someone will step forward with a higher offer for their stock.
Alcoa's Belda sidestepped a suggestion that the Reynolds bid was prompted by the Alcan-Pechiney-Algroup deal. He said the major consideration was that it was "the right timing" in terms of Reynolds's stock price. Belda said Alcoa held discussions about a deal with Reynolds often over the past several years -- and as recently as in March.
McCook's Lynch, meantime, was unimpressed by the sequence of events between Alcoa and Reynolds and determined to cull together his own counter-offer for the metals company.
"We thought for sure Reynolds' board would fight this to remain independent," he said. "Frankly I didn't think this merger would take place. I'm just stunned," he said, adding that Alcoa would not have imposed a $100 million break-up fee "if they didn't think a guy like me was serious."
Facing regulatory scrutiny
Even if an Alcoa-Reynolds marriage survives more competing bids, there's still a slew of regulatory issues to deal with. The agreement as it stands is expected to face a stiff antitrust review that may lead to forced divestitures of Reynolds' assets, analysts and shareholders said.
Analysts said a combined Alcoa-Reynolds will control more than 40 percent of the North American aluminum market and will certainly face regulatory scrutiny in the United States and abroad.
Belda, who indicated Alcoa would present its merger proposal to U.S. officials next week, said: "We do not see this to be a real concern to the Justice Department."
Belda also said Alcoa is interested in selling some assets, but said the company is not prepared yet to say exactly which ones. One antitrust expert said that could do the trick.
"I would expect the government would take a host of divestitures as a remedy," said Steven Sunshine, a partner with Shearman & Sterling in Washington who the ran the Justice Department's merger enforcement division from 1993 to 1995.
Sunshine said that as a rule of thumb, Justice typically draws the line of market control at about 30 percent before it intervenes. "A 40-percent share would raise a red flag. [The department] would have to determine whether the deal would adversely affect competition at that point."
By the numbers
As part of the transaction, Alcoa will offer 1.06 shares of its stock for each outstanding share of Reynolds, for a total value of about $4.3 billion. Alcoa also will swallow $1.5 billion in Reynolds debt.
Alcoa and Reynolds said they expect to close the merger by year-end and that the deal will increase earnings starting next year. Alcoa expects cost savings of about $200 million by the second year.
The new company would have about 120,000 employees -- 18,000 of them from Reynolds -- as well as annual revenue of about $20.5 billion and more than 300 locations in 36 countries, the firms said.
An Alcoa spokeswoman declined to comment on whether there would be job cuts connected with the deal, but Prudential's Morrison said: "I don't expect that many."
As for leadership, Belda will remain the leading executive of the new company. He said: "we are not going for the co-CEO deal" and added that the new company will retain its best talent - regardless of where it comes from.
Merrill Lynch and Goldman Sachs were the financial advisers to Reynolds; CS First Boston represented Alcoa. Skadden, Arps, Slate, Meagher & Flom was the legal adviser to Alcoa; Wachtell, Lipton, Rosen & Katz represented Reynolds.
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