Rio Tinto makes $38.1 billion all cash offer for Alcan

Rio Tinto and Alcan on July 12 announced they have reached an agreement for Rio Tinto to make an offer to acquire all of Alcan's outstanding common shares for US$101 per common share in a recommended, all cash transaction. The offer represents a total equity consideration for Alcan of approximately US$38.1 billion. The offer represents a premium of 65.5 percent to Alcan's all-time-high closing share price of US$61.03 on May 4, 2007 prior to the Alcoa offer. It also represents a premium of 32.8 percent to the value of Alcoa's current offer of US$76.03, based on Alcoa's closing share price on July 11, 2007.

 

The combined aluminum product group, to be named Rio Tinto Alcan, will be a new global leader in the aluminum industry with large, long-life, low-cost assets worldwide. The combined group's access to significant bauxite reserves, competitive alumina refining, low-cost hydro power, leading smelter technology, and a deep and diverse talent pool provides an excellent position to capitalize on the favorable demand fundamentals of the aluminum industry. Rio Tinto Alcan will also have a strong portfolio of growth projects.

 

Commenting on the offer, Rio Tinto chairman Paul Skinner said: "This transaction combines two leading and complementary aluminum businesses, and is a further step in Rio Tinto's strategy of creating shareholder value through investing in high-quality, large-scale, low-cost and long-life assets in attractive sectors. We believe that Alcan, with its proven operating expertise and unique set of competitively positioned aluminum assets and power sources, will be an excellent complement to our existing diversified portfolio. It also adds to our significant presence in Quebec and Canada, where we have longstanding operations in QIT-Fer et Titane, Iron Ore Company of Canada and Diavik Diamond Mines. We are very pleased that the enlarged aluminum product group, Rio Tinto Alcan, will be headquartered in Montreal and led by the current Alcan chief executive officer, Dick Evans."

 

Commenting on the attractiveness of the offer to Alcan shareholders, Quebec and Canada, Alcan chairman Yves Fortier said: "The agreed transaction with Rio Tinto is the outcome of a rigorous and thorough process conducted by the Alcan board. It achieves all of our stated goals, providing clearly superior value to Alcan shareholders while remaining true to our core values and obligations as responsible corporate citizens. In addition to a very attractive all cash premium, this transaction offers Alcan shareholders the certainty of a clear path to completion given our relatively limited operational overlap and a commitment by both parties to an expeditious close. Importantly, Rio Tinto has agreed to meet Alcan's existing business and social commitments to Quebec and Canada and the Alcan board has therefore determined that the offer meets the terms of our continuity agreement with the Government of Quebec."

 

Tom Albanese, Rio Tinto chief executive, stated: "This transaction will enable Rio Tinto's shareholders to benefit from the quality of Alcan's organization and asset portfolio, the favorable demand fundamentals of the aluminum sector and the synergies and enhanced development opportunities which the combination of our businesses will deliver. The acquisition will be value enhancing to shareholders, and we expect it to be earnings and cash flow per share accretive to Rio Tinto in the first full year. Rio Tinto intends to retain its focus on mining and metals activities by the divestment of Alcan's Packaging division, as jointly agreed with Alcan. The Engineered Products division will be retained with a focus on managing the portfolio for optimum value."

 

Dick Evans, Alcan's president and chief executive officer, commented, "With an attractive cost position bolstered by a strong technology portfolio, complementary refining and smelting assets, and a strong growth pipeline, the combination of Rio Tinto and Alcan will create a new global leader in the aluminum industry. We are pleased to have achieved this outstanding result for Alcan's shareholders while being able to offer compelling opportunities for our employees as part of an extremely strong, diversified global organization with an expanded presence in Montreal. Alcan Packaging will have better opportunities for development and success following its divestiture and we will ensure a smooth transition for all involved. As we move ahead together, we will remain true to our shared values, including commitments to the environment, health, safety and sustainability, and our focus on creating value. I am personally delighted and excited by the opportunity of leading the new larger aluminum group, Rio Tinto Alcan."

 

Fit with Rio Tinto's portfolio, strategy and value focus

Alcan has a high quality upstream asset portfolio with a sustainable low cost position through its excellent access to long life hydro power. In addition, the Alcan technology and hydro assets complement Rio Tinto's existing energy and climate change strategy, which is to position the Group for a future in which carbon emissions will be constrained.

 

The transaction is expected to create a new global aluminum industry leader in bauxite, alumina, power, aluminum and technology – with a strong pipeline of attractive growth projects for the future. Rio Tinto Alcan would be the largest global producer of aluminum and bauxite, based on current production, with a defined pathway through the commissioning of Gove and the committed expansion of Yarwun to becoming the largest producer of alumina.

 

The acquisition of Alcan will position Rio Tinto to capitalize on the strong demand fundamentals of the aluminum sector. The attractive physical properties of aluminum have ensured its use in a wide range of applications at all stages of economic development, including construction and infrastructure development, transportation, and consumer goods and packaging.

 

The offer is value enhancing to Rio Tinto shareholders based on Rio Tinto's rigorous project evaluation criteria. Rio Tinto expects the acquisition to be earnings and cash flow per share accretive to Rio Tinto in the first full year of consolidation.

 

Overall anticipated post tax synergies from the transaction are expected to be around $600 million per year. The combination of the two companies' existing assets offers attractive opportunities to consolidate ownership and achieve capital and operational efficiencies.

 

The geographical profile of the combined businesses will provide an enhanced platform to exploit future global growth opportunities.

 

The increased overall size of Rio Tinto following the transaction will provide the opportunity for a strategic review of all Rio Tinto assets focusing on those which lack the long term competitive position to belong in the larger group.

 

Operations in Quebec/ Canada

Rio Tinto has been an investor in Quebec and Canada for decades and currently has significant business activities in the Province of Quebec (including QIT-Fer et Titane and Iron Ore Company of Canada), and the Northwest Territories (Diavik Diamond Mines). In 2006, these assets generated revenues of US$2.3 billion (representing nine percent of Rio Tinto's gross revenues) and paid taxes of US$409 million (representing 11 percent of total taxes paid by Rio Tinto). In 2006, Rio Tinto employed approximately 4,300 people in Canada, with a significant number located in Quebec.

 

Rio Tinto is committed to growing the combined Rio Tinto and Alcan presence in Canada, particularly in the Provinces of Quebec and British Columbia. In addition to headquartering the combined aluminum product group in Montreal, Rio Tinto will maintain the product group's aluminum smelting technology research and development headquarters in Quebec. This will involve the relocation of Rio Tinto Aluminium's existing smelting technology unit to Quebec.

 

In addition, Rio Tinto intends to locate one of its regional shared service hubs in Montreal to support its enlarged asset base and operations in Canada.

 

Operations in Australia

Rio Tinto recognizes Australia's strengths in bauxite extraction and alumina refinery operations and project development. It is committed to leveraging those strengths by locating the combined global Bauxite and Alumina business and associated research and development activities in Queensland. As Rio Tinto and Alcan's assets in Australia are largely complementary, it is expected that the merger and integration will provide opportunities for cost synergies and revenue enhancement as a result of expansion of Australian output.

 

Rio Tinto has a significant program of capacity growth in place following the recent announcement of the expansion at Rio Tinto's Yarwun alumina refinery, and the ongoing bauxite capacity expansion at Weipa.

 

Operations in France

Rio Tinto has had operations in France since the 1960s, and maintains a research and development facility for its Diamonds and Minerals product group in Toulouse. Rio Tinto recognizes Alcan's extensive presence in France as well as France's long history of expertise in research and development in aluminum technology. Rio Tinto is committed to building upon Alcan's research and development capabilities in France, including advanced smelter technology programs, currently under development by Rio Tinto Aluminum.

 

Common cultures

Rio Tinto and Alcan share demonstrated common values, including a strong commitment to the principles of sustainable development, including health and safety of employees, excellence in environmental stewardship and positive engagement with local communities. Accordingly, Rio Tinto is committed to creating the Rio Tinto Alcan foundation in Canada, which will have an endowment of C$200 million built-up over a five year period. It will replace Alcan's existing practice of donating one percent of pre-tax profits to community, educational, cultural and charitable commitments.

 

Governance, management and employees

Rio Tinto holds Alcan's organisation in high regard and the current Alcan executive team will play a role in both the combined aluminum business and the enlarged Rio Tinto Group. The current Alcan chief executive officer, Dick Evans, will become chief executive of the combined aluminum product group, Rio Tinto Alcan, based in Montreal and will report directly to Rio Tinto's chief executive, Tom Albanese. Alcan employees will benefit from opportunities within the enlarged Rio Tinto Group, including a stronger and more strategically positioned upstream aluminum business. Key positions in Rio Tinto Alcan will be filled by people from both organisations. The combination of the two organisations will afford Alcan and Rio Tinto employees unparalleled opportunities to develop their careers.

 

Rio Tinto will add three new members to its board: two non-executive members of the Alcan board and Evans as chief executive of the aluminum product group. The size of the board will therefore increase on closing from 13 to 16.

 

Rio Tinto intends to pursue the basis for a secondary listing of Rio Tinto plc shares on the Toronto Stock Exchange.

 

Rio Tinto plans to establish a Canada Forum comprising the chairman, chief executive, Canadian non-executive directors, other Canadian advisers and senior executives based in Canada, including the chief executive of Rio Tinto Alcan, to advise its board on Canadian economic, political and social issues. This will be modelled on Rio Tinto's comparable Australia Forum.

 

Given the increased importance of France in Rio Tinto's portfolio which will result from this transaction, Rio Tinto intends to appoint a suitably qualified adviser from Alcan's existing group of non-executive directors to assist in relation to business developments in France.

 

Board of Alcan recommendation

The board of Alcan, after consulting with its financial and legal advisors and the Strategic Committee of directors, has unanimously recommended that Alcan shareholders should accept the offer. Morgan Stanley, acting as lead financial advisor to the board of Alcan, has provided a written opinion to the board of Alcan that the offer is fair, from a financial point of view, to Alcan shareholders.

 

Support agreement

The support agreement between Rio Tinto and Alcan provides for a break fee of US$1,049 million payable by Alcan to Rio Tinto in certain circumstances, and of a break fee payable by Rio Tinto to Alcan in certain circumstances equal to the lesser of US$1,049 million and 1 percent of the market capitalization of Rio Tinto on the date such payment becomes due. Separately, Rio Tinto or Alcan may become liable to pay expense reimbursement of US$200 million to the other party in certain circumstances. In addition, the agreement contains, among other things, customary terms and conditions for an agreement of this nature, including a non-solicitation provision, the right of notification should Alcan receive a third-party proposal and the right to match any proposal which the board of Alcan deems superior.

 

Continuity agreement

A special feature of the proposed transaction is Alcan's obligations under the Continuity Agreement with the Quebec Government.

 

The Continuity Agreement was signed in 2006 when Alcan, the Government of Quebec and Hydro Quebec agreed upon investments, loans, and further water and power rights. Alcan then made an undertaking that it would maintain its head office and principal place of business in Quebec and that it would ensure that, in the event of a change of control, the acquirer would maintain the same level and quality of commitments in Quebec to socio-economic programs and to regional development as then existed at Alcan.

 

In such eventuality, a potential acquirer needs to demonstrate that, as a result of the proposed transaction, there is no reasonable basis to believe that there will be either a diminishment of Alcan's commitment to the economy and society of Quebec or a direct or indirect negative impact on the economy and society of Quebec.

Rio Tinto has given assurances, evidence and commitments to the board of Alcan and the Government of Quebec that Rio Tinto Alcan will maintain its head office and principal place of business in Quebec together with the same level and quality of commitments as now exist at Alcan.

 

Rio Tinto has demonstrated to the satisfaction of the board of Alcan that the requirements of the Continuity Agreement have been met and is notifying the Government of Quebec accordingly.

 

About the offer

Rio Tinto expects to file the offer and takeover bid circular containing the full terms, conditions and other details of the offer with the Canadian Securities regulatory authorities and the Securities and Exchange Commission of the United States on or about July 23, 2007.

 

The offer is subject to a number of conditions including valid acceptances of not less than 66.667 percent of Alcan shares on a fully diluted basis and the approval of Rio Tinto shareholders. The board of Rio Tinto has approved the transaction and has undertaken to recommend the transaction to its shareholders, at the time of mailing the shareholders circular. The offer will also be subject to certain customary conditions including receipt of necessary regulatory and antitrust approvals, including in the United States, Canada, the European Union and Australia, and the absence of material adverse changes or effects. The offer is expected to close in the fourth quarter of 2007.

 

The offer will be made to holders in France of shares admitted to trading on Euronext-Paris.

 

An announcement including the main information relating to Rio Tinto's offer documents will be prepared and released pursuant to article 231-24 of the AMF General Regulation and will contain information relating to how and the time period within which Alcan shareholders residing in France can accept this offer.

 

The offer will be made to holders in Belgium of Alcan shares and/or certificates admitted to trading on Euronext-Brussels (the "IDRs"). A Belgian supplement, addressing issues specific to holders of shares and/or IDRs in Belgium (the "Belgian Supplement") is expected to be approved by the Belgian Banking, Finance and Insurance Commission. Once such approval has been obtained, the offer and takeover bid circular can be made available in Belgium to holders of shares and/or IDRs together with the Belgian Supplement.

 

Financing

The acquisition of Alcan will be financed by Rio Tinto through newly committed bank facilities underwritten by The Royal Bank of Scotland, Deutsche Bank, Credit Suisse, and Societe Generale. The offer will not be conditional on financing. Rio Tinto's goal is to maintain a single A rating. The commitment to a progressive dividend policy will be maintained. The existing Rio Tinto buyback program will be discontinued.

 

About Rio Tinto

Rio Tinto is a leading international mining group headquartered in the United Kingdom, combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.

 

Rio Tinto's business is finding, mining, and processing mineral resources. Major products are aluminum, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa.

 

About Alcan

Alcan Inc. is a leading global materials company, delivering high-quality products, engineered solutions and services worldwide. With operations in bauxite mining, alumina processing, primary metal smelting, power generation, aluminum fabrication, engineered solutions as well as flexible and specialty packaging, and with world class technology, Alcan is well positioned to meet and exceed its customers' needs. Alcan is represented by 68,000 employees, including its joint ventures, in 61 countries and regions.