Wave of Consolidation Hits Aluminum Industry

The struggling world aluminum industry was thrown into tumult Wednesday when its biggest producer, Alcoa Inc., launched an unsolicited bid to buy U.S. rival Reynolds Metals Co. only hours after aluminum producers in Canada, France and Switzerland unveiled their own merger plans.

The dramatic frenzy to consolidate reflects the companies’ effort to cope with a years-long slump in global aluminum prices caused by excess supplies of the light metal, which is used in everything from soda-pop cans to automobiles. Stockpiles have swelled because several economic shocks have depressed demand during the decade, including the Soviet Union’s collapse and, more recently, the recessions in Asia and Brazil.

It’s the same scenario that’s occurred in other commodity industries--including oil, paper and chemicals--where low prices and global overcapacity have sapped earnings, prompting companies to merge in an attempt to gain market share and prosper.

Just last week, for instance, Dow Chemical Co. agreed to buy rival Union Carbide Corp. for $8.9 billion in stock amid a downturn in chemical prices. And more deals among smaller aluminum makers are likely, analysts said.

Alcoa’s bid of $5.6 billion, or $65 a share, in cash and stock for Reynolds came after Canada’s Alcan Aluminium Ltd. agreed to spend $9.2 billion in stock to buy Pechiney of France and the aluminum and packaging units of Switzerland’s Alusuisse Lonza Group, also known as Algroup. That deal would have made Alcan the world production leader, but Alcoa would retain its title if it buys Reynolds.

And although the Alcan deal spurred Pittsburgh-based Alcoa to act, Alcoa revealed that it had first approached Reynolds about a merger back in March, but to no avail. Yet Reynolds has continued to say publicly that it wouldn’t rule out mergers in general.

Reynolds, based in Richmond, Va., said it will not respond to Alcoa’s latest offer until Monday. But Reynolds’ stock soared $9.38 a share to close at $65.25 in New York Stock Exchange composite trading, signaling that Wall Street expects that another suitor might surface and top Alcoa’s $65-a-share offer.

The stock of Alcoa--a component of the Dow Jones industrial average--also rallied, gaining $2.94 a share to close at $69.38 on the Big Board.

Stocks of smaller aluminum makers also rallied on the speculation that more mergers may be coming. Kaiser Aluminum Corp. gained 88 cents to $9.06 a share; Century Aluminum Co. rose 69 cents to $10.06 a share; and Maxxam Inc. jumped $1.19 to $61.50 a share.

The Alcoa and Alcan deals are certain to get close look from U.S. and European antitrust regulators, but experts were divided about whether the deals might be derailed on those grounds.

A marriage of Alcoa and Reynolds, for instance, would have “serious problems,” asserted Steven Newborn, an antitrust lawyer with law firm Rogers & Wells in Washington. In the area of specialty aluminum products, he said, there is concern that customers would not have enough domestic suppliers, and so regulators are “certainly going to look at this with a great deal of scrutiny.”

But others said that even if the mergers go through, Alcoa and Alcan still would not be able to exert substantial control over prices, which hit a five-year low in March before rebounding somewhat in recent months. That’s because the majority of the world’s aluminum output comes from hundreds of regional manufacturers scattered around the globe.

Nonetheless, the mergers should enable Alcoa and Alcan to better balance their supplies with demand and thus smooth out swings in aluminum’s price, wring excess costs out of their combined operations, generate higher profits and gain footholds in new markets.

Alcoa, for instance, would gain a much stronger presence in the consumer market with Reynolds, which makes a variety of food wraps and foil products under the Reynolds Wrap brand. With Reynolds, Alcoa’s annual sales also would jump to $21 billion from $15 billion.

“These merger plays are not about increasing market share . . . such that they can then exert some huge price increase,” said Lou Pahountis, a metals specialist at Andersen Consulting in Pittsburgh. “It’s about the ongoing globalization of this industry and the companies’ striving to achieve the economies of scale that these capital-intensive industries now must have.”

And it’s important for Alcoa and the others to stake their positions now, because demand for aluminum is expected to keep steadily increasing, analysts said. For instance, although aluminum still accounts for a small part of automobile manufacturing, car makers’ demand for aluminum, which is less costly than steel, will keep growing as they seek more fuel efficiency and lower production costs.

“Going forward, the demand for aluminum should be growing every year on average,” and the merged companies would be able to fill that demand more profitably, said Jeffrey Miller, an analyst at Duff & Phelps Credit Rating Co. in Chicago. “So paring the number of major players like this is a positive.”

Alcoa already has made several acquisitions, including its purchase last year of Alumax Inc., the No. 3 aluminum maker in the U.S. market at the time. Those acquisitions, along with massive cost-cutting and improved production techniques, also have enabled Alcoa to keep increasing its profits despite the slump in aluminum prices.

That’s why Alcoa’s stock has soared 86% so far this year. And in its offer to Reynolds, Alcoa proposed swapping cash and stock for every Reynolds share, but said it would consider paying all stock if that’s what Reynolds wants.

Canada’s Alcan, meanwhile, said its merger deal would result in the company being 44% owned by current Alcan stockholders, 29% by Pechiney investors and 27% by Algroup holders. Algroup’s other interests in energy and chemicals would be spun off to existing investors before the aluminum merger occurs. Alcan’s stock jumped $3.06, to close at $36.69 a share, on the NYSE.

Alcan, ironically, used to be part of Alcoa, which itself used to be called Aluminum Co. of America. But Alcoa divested the Canadian operation in 1928.