Reports out of Australia indicate that metal giant Rio Tinto (RTP) has hired a banker to advise the company on a possible purchase of Alcan (AL). Alcoa (AA) has already made an offer, which many find generous, but it has been rejected.
One question the news raises is why any firm would want to pay more than Alcoa was willing to .Alcan’s stock is up about 80% this year. Alcoa and BHP Billiton (BHP) another large metals company that has been rumored as an acquirer of several firms are both up in the 20% to 30% range.
As fate might have it, rumors about a BHP takeover of Rio Tinto are, in part, responsible for some of the 80% rise in its shares over the last year. This give RIO an inflated stock value, making its easier to craft an offer for Alcan. One overvalued currency being used to buy another.
Alcoa and BHP are at a distinct disadvantage in this game. The have not been as clearly identified as buyout targets, so their share prices have remained reasonable. In a word, they end up having less to offer.
If Rio Tinto does buy Alcan, investors may have a problem. A merger of two companies with shares that are sky high is often a prelude to a disaster.
Douglas A. McIntyre
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