For a company known for its conservatism when it comes to acquisitions, Rio Tinto certainly knows how to stifle the competition when it gets round to making one. Today’s staggering $38.1 billion offer for Alcan prevents Alcoa even thinking about coming back to the table.
A $1 billion break-fee agreed by Rio and Alcan is also likely to scare off Rio’s larger rivals such as BHP Billiton and Brazil’s CVRD and Russia’s Rusal.
This morning’s share price fall shows that investors are worried about the high price Rio is paying. But looking to the longer term the deal makes the Anglo Australian miner the world’s biggest producer of aluminium and gives the group 17 per cent of the market for bauxite, used to make drink cans and aircraft components.
Rio management expects the deal to be earnings enhancing in the first full year following completion, 2008.
Tom Albanese, Rio’s chief executive, said that Alcan puts the group in an exceptional position to benefit from “the China story”, and this reflects the reason why Rio can feel so confident about paying so much on its target.
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Aluminium prices have surged 50 per cent in the past two years on the back of soaring demand from China and India. That demand shows no sign of slacking.