Reynolds Agrees to Takeover by Alcoa

Reynolds Metals Co. on Thursday accepted a sweetened $4.4-billion, all-stock bid from Alcoa Inc., the world’s top aluminum producer, swiftly ending a hostile takeover in the long-depressed industry.

The transaction came just four days after Reynolds, the third-largest aluminum producer, rejected a $4.1-billion cash-and-stock bid from Alcoa and said it would explore a sale.

With the purchase of Reynolds, Alcoa would retain its spot as the No. 1 aluminum producer despite a three-way deal announced last week between Canada’s Alcan Aluminium Ltd., France’s Pechiney and Alusuisse Lonza Group Ltd. of Switzerland.

Together, the transactions would concentrate 28% of the world’s aluminum production capacity in the hands of the new companies. The purchase of Reynolds comes as low prices force producers to combine and cut costs.

“The new company will be better positioned to address the ongoing globalization of the metals industry and the new competitive landscape this is creating,” Alcoa Chief Executive Alain Belda said. “It will permit the greater efficiencies and cost reductions required by an environment that has seen the lowest prices in many years for our commodity products.”

But the price being paid for Reynolds, maker of Reynolds Wrap aluminum foil, fell short of Wall Street expectations, and the stocks of both companies fell. Alcoa dropped $1.69 to close at $65.19, while Reynolds fell $2.69 to finish at $65.56, both on the New York Stock Exchange.

The friendly pact startled investors because it came just three days after Alcoa said it would launch a hostile takeover of Reynolds.

Pittsburgh-based Alcoa had previously offered to buy Reynolds for $65 a share in cash and stock, but the bid was rejected as inadequate. Alcoa then said it would launch a $65-per-share cash tender offer for Reynolds.

The subsequent agreement calls for Alcoa to pay 1.06 shares for each share of Richmond, Va.-based Reynolds. Based on Thursday’s closing stock prices, the deal valued Reynolds at $69.10 a share, about 6% above Alcoa’s original bid of $65 a share.

The transaction also calls for Alcoa to assume $1.5 billion in Reynolds debt.

Prospects for a rival bid lost some steam Tuesday when executives of the three-way Alcan-led deal ruled out a rival bid for Reynolds.

A source close to the situation said Alcoa and Reynolds began friendly talks just hours after Alcoa disclosed its plans Monday to wage a full-blown hostile takeover. Terms of the transaction permit Reynolds to solicit new third-party bids for 30 days.

The merger pact is subject to approval by antitrust regulators and Reynolds shareholders, but the companies said they expect the deal to close by year-end. Alcoa Chief Executive Alain Belda said in a conference call that he sees no antitrust hurdles.

Alcoa and Reynolds said they have about $20.5 billion in annual revenue, and the other three had combined 1998 revenue of $21.6 billion. The combined company would have about 120,000 employees. Analysts expect about 10% of Reynolds’ 20,000 workers to be fired.

The companies did not address whether Reynolds Chairman and Chief Executive Jeremiah Sheehan would have a role at the combined company.

The agreement also indicates the conditions under which the companies might walk away from the transaction.

If the government demands that Alcoa sell assets or businesses that account for more than 2.5% of the combined 1998 sales of the companies, the transaction can be terminated.

Reynolds also can terminate the merger if it gets an outside bid that the board decides is superior to Alcoa’s offer. However, Alcoa would have three days to top the outside offer after receiving notice of the alternative bid from Reynolds.

Reynolds isn’t ruling out another bidder. The company said in the filing with the Securities and Exchange Commission that it can consider and seek other bidders for another 30 days. If the company accepts a bid, it must pay Alcoa a termination fee of $100 million, according to the filing and reported by Bloomberg News.