May 7 (Bloomberg) -- Alcoa Inc. said it plans to make an unsolicited $26.9 billion cash and stock takeover offer for Alcan Inc. to create the world's largest aluminum producer as metal prices rally.

Each Alcan share would be exchanged for $58.60 in cash and 0.4108 of an Alcoa share. That values Alcan at $73.25, or 20 percent more than its closing price on May 4, New York-based Alcoa said today in a statement. Shares of both companies surged, and Alcan said it would consider the offer after earlier takeover talks failed.

The combination would create a company with twice the capacity of United Company Rusal, which completed a three-way merger in March to top Alcoa as the world's largest producer. Alcoa and Alcan have been losing market share to producers in Russia and China as aluminum prices doubled the past four years.

``This transaction makes a lot of sense because it would put them on a larger scale to compete in the global market,'' said Kirk Schmitt, who helps manage $1.1 billion at Victory Capital Management in Cleveland. ``I don't think it gets done at this price, but I do think it will get done.''

Shares of Montreal-based Alcan rose $21.08, or 35 percent, to $82.11 at 4:15 p.m. in New York Stock Exchange composite trading, a record daily gain. Before today, Alcan had risen 15 percent in the past year. Alcoa rose $2.97, or 8.3 percent, to $38.63, their biggest one-day jump since November 2002.

Bond Risk

The perceived risk of owning Alcoa and Alcan bonds rose today, and Moody's Investors Service said it may downgrade $7.4 billion of debt securities issued by the two companies.

Contracts based on $10 million of Alcoa bonds jumped $25,000 to $47,500, the highest in two years, according to prices compiled by CMA Datavision. Alcan credit-default swaps rose $15,300 to $38,000, composite prices from London-based CMA show. An increase in the five-year contracts, used to speculate on a company's ability to repay its debt, indicates deterioration in the perception of credit quality.

``There is an expectation of a higher bid'' for Alcan from Alcoa or another company, said Thomas Winmill, who manages $175 million at the Midas Fund in New York. ``There have been a lot of these takeovers in the base-metals sector, where you see multiple parties enter in when one of these unique franchises come up for bid.''

Metals Mergers

Rising demand for metals has sparked 473 deals or bids in the industry this year, valued at $55.4 billion, including Hindalco Industries Ltd.'s $5.7 billion offer for Novelis Inc., data compiled by Bloomberg show. For all of 2006, there were 1,145 deals valued at $176.5 billion, including Freeport-McMoRan Copper & Gold Corp.'s $23 billion takeover of Phelps Dodge Corp.

Before today, Alcoa shares had jumped 24 percent in the past six months partly on speculation the company may be an acquisition target. The Times of London said Feb. 13 that Melbourne-based BHP Billiton Ltd., the world's largest mining company, and Rio Tinto Plc may be planning bids for Alcoa.

With about 368 million Alcan shares outstanding, the Alcoa offer values the company at about $26.9 billion and would be the biggest takeover ever in the metals and mining industry, based on data compiled by Bloomberg. Including debt, the deal would be valued at $33 billion.

Failed Talks

``This offer follows almost two years of discussions between our companies regarding a variety of potential business combination transactions, including unsuccessful board-level discussions of a merger last fall,'' Alcoa Chief Executive Officer Alain Belda said on a conference call. ``We are disappointed'' that the negotiations, which ended in November, did not result in an agreement.

Alcan, in a separate statement, said its board of directors will ``consider the proposal'' and urged shareholders to take no action until the review is complete.

Belda wants to increase Alcoa's focus on aluminum production, its most profitable business. Last month, the company said it may sell units that make Reynolds Wrap, packaging and electrical components and had combined sales of $4.8 billion last year.

Alcoa forecast $1 billion in savings within three years of acquiring Alcan.

``Alcan has more of its earnings and sales from primary metals and alumina and Alcoa does not, so putting the two together emphasizes a broader plate of products,'' said Peter Klein, who helps oversee $21 billion at Fifth Third Asset Management, including almost 900,000 Alcoa shares.

Russia, China

``We must deal head-on with the global competitive realities,'' Belda said. ``No other combination would create as much value. It will enable us to invest in attractive growth projects and explore new and more efficient technologies to produce aluminum.''

Alcoa had been the world's largest aluminum producer until March, when Russia's Rusal was created by the merger of OAO Russian Aluminium, OAO Sual Group and the alumina assets of Swiss trader Glencore International AG.

Rusal produces about 4 million metric tons a year, compared with Alcoa's 3.5 million tons. Alcoa, still the biggest aluminum company by sales, said today a combination with Alcan would create a company with 7.8 million tons of production capacity and $54 billion in sales.

China and Russia control almost 35 percent of the global aluminum market and 40 percent of production capacity, while market share has decreased for Alcoa and Alcan, Belda said. China's market share has jumped to 22 percent from 7 percent in the past eight years, he said.

Antitrust Concern

Alcoa would gain an edge over competitors by securing more supplies of Alcan's cheap electricity, which is a major cost for aluminum smelters, Victory Capital's Schmitt said. ``As long as you have an electricity advantage, you should be able to compete with the Chinese, and Alcan gets a lot of its power from hydroelectricity, which is the cheapest,'' he said.

Alcoa plans to resolve antitrust concerns by selling some assets. Alcan was created from Alcoa-owned assets when the company was ordered by U.S. regulators in 1928 to break up its Canadian and foreign assets into a separate company.

Alcoa said it would maintain dual headquarters in New York and Montreal and that the deal probably can be completed by the end of the year.

The formal offer probably will start May 8, Alcoa said. Alcan is the world's second-biggest aluminum company by 2006 revenue.

Advisers

Alcoa said it received a commitment letter from Citigroup Inc. and Goldman Sachs Group Inc. to finance the transaction. Citigroup, Goldman, BMO Capital Markets and Lehman Brothers are advising Alcoa.

Credit-default swaps are financial instruments used to speculate on a company's ability to repay its debt. An increase in the five-year contracts, used to bet on the company's ability to repay its debt, signals deterioration in the perception of credit quality. A decrease means the opposite.

Credit-default swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

To contact the reporter on this story: Rob Delaney in Toronto at robdelaney@bloomberg.net

Last Updated: May 7, 2007 18:03 EDT