Buyers Taking a Shine to Alcoa?

The shares climbed Tuesday on a report BHP Billiton and Rio Tinto are planning a takeover of the aluminum giant

Amid the current buyout wave, the targets appear to keep getting bigger. No sooner had real-estate giant Equity Office Properties (EOP) been snapped up in a $39 billion deal on Feb. 9 than word came of another potential blockbuster. A Feb. 13 press report indicated that aluminum giant Alcoa (AA) could be takeover bait.

BHP Billiton (BHP) and Rio Tinto have drawn up plans for a $40 billion takeover of the Pittsburgh aluminum producer, the British newspaper The Times reported on Feb. 13, explaining that the two mining giants are looking for ways to expand production as prices hit record levels. After the news, investors bid up Alcoa's stock price by 5.1% to $34.58 per share in early afternoon trading on the New York Stock Exchange.

The news came one day after another metals megadeal: Mumbai-based aluminum and copper company Hindalco Industries (HNDNF) agreed to spend about $6 billion to absorb Atlanta-based Novelis (NVL), an aluminum-sheet maker (see, 2/12/07, "India: Another Overseas Trophy Deal").

S&P chief investment strategist Sam Stovall recommended that investors take advantage of the M&A euphoria around Alcoa by cutting back on exposure to the entire materials sector. S&P lowered its recommendation on the group to underweight from marketweight on Feb. 13, as it expects the sector to grow its earnings per share by only 6% during 2007 after it had exploded by 27% in 2006. (S&P, like, is owned by The McGraw-Hill Companies.)

Meanwhile S&P analyst Leo Larkin downgraded his opinion on Alcoa's stock to hold from buy, explaining that their run-up Feb. 13 has made them more expensive, as the shares were trading just below his our 12-month target price of $36.

Even with aluminum prices at dizzying heights, Alcoa's stock price had languished earlier this year as the company struggled to rein in its costs and compete globally, which could make the company more attractive as a takeover target. But the stock has risen recently from its low of the year at $26.39 per share on Oct. 11.

In November Alcoa had announced a plan to cut about 10% of its 129,000 workforce, or roughly 13,100 jobs. Among other things, Alcoa wants to combine its soft alloy extrusion business with the one owned by the Norwegian consumer goods, specialty materials and financial investment company Orkla ASA Sapa Group. By the end of early 2007, Orkla will have a majority ownership in a new joint venture operated by Sapa. Alcoa mentioned a plan to eventually sell this new entity in an initial public offering.

But while cross-border joint ventures are common practice, the potential acquisition of a big U.S. resource concern by non-U.S. buyers may raise national security flags. A potential deal by China's CNOOC (CEO) to acquire oil outfit Unocal was scuttled in part by political pressure (see, 1/4/05, "Why China's Unocal Bid Ran out of Gas"). Any deal for the No. 1 U.S. metals producer by foreign entities would no doubt invite scrutiny from lawmakers.

Alcoa didn't respond to request for comment within press time.

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