No inflation, new paradigm---new cartels?
Alcan, Algroup and Pechiney Are in Talks to Create
No. 1 Aluminum Producer
By Jonathan Make
Alcan, Algroup, Pechiney May Form Top Aluminum Maker (Update9)
(Updates share prices in 7th paragraph.)
Montreal, Aug. 10 (Bloomberg) -- Alcan Aluminium Ltd. of
Canada, France's Pechiney SA and Switzerland's Algroup said they
may combine to form a company that would surpass Alcoa Inc. as
the world's top aluminum maker.
The companies would have about 100,000 workers and $20
billion in revenue from aluminum smelting, packaging and
chemicals, overtaking Alcoa, which had about $15 billion in sales
last year. A combination would allow them to boost profit by
cutting costs as aluminum prices begin to recover from the five-
year low reached in March.
Industrial companies worldwide -- auto-parts makers, oil
refiners and electric utilities -- are merging because the
inability to raise prices leaves cost cutting as the surest way
to shore up earnings. The same pressures now have Alcan, Pechiney
and Algroup moving to accelerate consolidation in the aluminum
industry through an unusual three-country merger.
''What we're seeing here isn't limited to aluminum
manufacturers,'' said ABN Amro analyst Vahid Fathi, who has an
''underperform'' rating on Alcan. ''Producers, by and large, have
no control whatsoever over the price of the products that they
supply to market.''
Montreal-based Alcan, the No. 2 aluminum maker, said last
month that second-quarter profit fell 42 percent because of lower
prices for the metal, used in cars, airplanes, cans and
construction materials.
Pechiney fell 0.65 euros to 51.05 euros ($54.66) in Paris,
while Algroup rose 66 Swiss francs to 1,810 francs ($1,210.02) on
the Swiss Exchange.
Alcan shares in Toronto rose C$2.95 to C$50.50 (US$33.74).
Alcoa, based in Pittsburgh, rose 13/16 to 66 7/16. The
possibility of the three-way merger was reported today in the
Wall Street Journal.
Job Cuts Possible
Alcan could eliminate sales and marketing jobs that overlap
with Pechiney's in Latin America, Asia and Europe, said St. James
Securities analyst Ray Goldie, who has a ''hold'' rating on
Alcan.
Alcan already is planning to close two or three of its
aluminum-siding factories in Europe, moving production to one
factory in Italy, said Victor Lazarovici, an analyst at Nesbitt
Burns Securities Inc.
''The biggest single problem for this industry has been a
very large investment in capacity, so it can be located close to
domestic markets,'' Lazarovici said. ''If you look at General
Motors, you don't have factories in each state producing every
kind of car because people like to buy local. In Europe, that's
what you have'' among aluminum producers.
Ownership
Alcan shareholders will own 44 percent of the new company,
Reuters reported, citing unidentified industry sources. Pechiney
shareholders will own 29 percent and Algroup will get 27 percent,
Reuters said. Alcan President Jacques Bougie will head the new
group and Pechiney Chairman Jean-Pierre Rodier will be the chief
operating officer, according to Reuters.
Alcan spokesman Dan Gagnier declined to comment on the
report.
Any combination of aluminum makers from three countries
could be scuttled by executive squabbles and cultural
differences, said Washington antitrust attorney Keith Shugarman.
''Cultural issues are always the biggest problem in the
integration of companies in cross-border transactions, let alone
a three-country deal,'' said Shugarman, of Goodwin, Procter &
Hoar.
French is the first language of Alcan's Bougie, Goldie said,
so that could help. Pechiney is based in Paris and many
executives at Zurich-based Algroup also speak French.
Regulators
Any merger would also be scrutinized by U.S. and Canadian
regulators, who may order the companies to sell some operations,
Shugarman said. U.S. Justice Department spokesman Jennifer Rose
declined to comment.
Last June, the department cleared Alcoa's $3.8 billion
purchase of Alumax Inc. after the company agreed to sell some
plants. U.S. regulators took about three months to review the
acquisition, which has been a success.
Alcoa's profit is rising after slashing several hundred
Alumax jobs, and its stock has almost doubled in the past year
while the Dow Jones Industrial Average has risen about 24
percent.
Canada's Competition Bureau, which reviews most mergers, can
take six months or longer to review complicated transactions such
as one involving Alcan, Pechiney and Algroup, said spokeswoman
Cecile Suchal. French and Swiss antitrust officials couldn't be
reached for comment.
A combined Pechiney-Alcan-Algroup would produce about 2.6
million metric tons of aluminum a year, or about 10 percent of
global supply, overtaking Alcoa, which now produces 2.5 million
tons. It would create the market leader in both Europe and North
America for aluminum products used in everything from cars to
cosmetics packaging.
''Alcan has stolen a march on its biggest competitors in
North America,'' said Nigel Kieser, an analyst at J.P. Morgan in
London. ''If it didn't do something, it was going to lose out on
the consolidation in the European industry to Alcoa.''
The combined group would also produce some 8 million tons of
alumina, the raw material used to make aluminum metal, leaving it
the largest producer of the commodity.
'Advanced Discussions'
EU antitrust spokesman Stefan Rating said the companies had
met commission officials Aug. 4 and ''pre-notified'' their
intention to form a merger or joint venture.
Alcan, Pechiney and Algroup said in statements that they are
in ''advanced discussions ... regarding potential business
combinations,'' though they added that there was ''no certainty
that these discussions will result in any concrete agreement.''
Pechiney, the world's fourth-biggest aluminum producer,
Alcan and Algroup declined to elaborate.
Morgan Stanley Dean Witter & Co. is advising Alcan, Credit
Suisse First Boston is advising Pechiney, and Goldman Sachs Group
is advising Algroup, people familiar with the situation said.
Officials at the firms and the companies declined to comment.
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