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Alcoa-Reynolds merger a done deal

Thursday, May 04, 2000

By Len Boselovic, Post-Gazette Staff Writer

Analysts say government-mandated asset sales could take some of the life out of the party created by Alcoa's $5.8 billion acquisition of Reynolds Metals Co.

    Aluminum powerhouse

Here's a rundown on a combined Alcoa-Reynolds Metals and the terms of Alcoa's agreement with the U.S. Department of Justice.

Annual sales: $21 billion

Employees: 126,700

What Reynolds' shareholders

get: 1.06 Alcoa shares for each of their shares

What Alcoa must sell: businesses with annual sales of less than $400 million:

Reynolds' alumina refinery in Corpus Christi, Texas

Reynolds' interest in alumina refineries in Australia and Germany

A 25 percent interest in Reynolds' aluminum smelting plant in Longview, Wash.

Source: Alcoa


Antitrust regulators in the United States and Europe approved the combination yesterday after Alcoa agreed to sell Reynolds' alumina businesses as well as a 25 percent stake in Reynolds' Longview, Wash. aluminum smelter. Alcoa said the businesses generate less than $400 million in revenue annually.

Analysts believe the asset sales will deprive Alcoa of some of the benefits it was seeking through the merger. They were most distressed at the requirement to sell Reynolds' 56 percent interest in the Worsley alumina refinery in Australia. Alumina, a white powder, is the main ingredient in aluminum, and the Australian plant is viewed as one of the most efficient in the world.

"Worsley may have the lowest-cost alumina in the world. I really hate to see that go," said Charles Bradford, a New York-based metals analyst. "It's kind of a stretch for the U.S. government to say they should have to sell Australian alumina. The Australians aren't telling them to. They don't care."

The merger, first reported yesterday in, brings together the world's No. 1 and No. 3 aluminum producers. Combined, Alcoa and Reynolds will have annual sales of about $21 billion and 126,700 employees.

The acquisition gives Alcoa new exposure to consumer markets, including an established brand name in Reynolds Wrap. It also expands Alcoa's reach in construction and transportation markets and gives it a distribution business, Reynolds Aluminum Supply Co. RASCO is a partner in MetalSpectrum, a metals e-commerce venture announced Tuesday that Alcoa also has a stake in.

Alcoa President Alain Belda said even with the divestitures, "the business case for the merger remains compelling." He vowed Alcoa will move quickly to capitalize on the benefits of the acquisition.

Reynolds shareholders will get 1.06 Alcoa shares for each of their shares. At Alcoa's closing price yesterday of 63 5/8, the acquisition is valued at $5.8 billion, including $1.5 billion in assumed debt.

The government-mandated divestitures are to be made over nine months. They target one of the main concerns critics had with the Alcoa-Reynolds combination when it was announced in August: that Alcoa's dominance in the alumina business could stifle competition.

Alumina, which is derived from bauxite, also is used in detergents, flame retardants and other products. Without the asset sales, Alcoa would have controlled 39 percent of the world market for alumina used by aluminum producers, said Joel Klein, head of the U.S. Department of Justice's antitrust division.

"These divestitures will protect against a loss of competition for the aluminum producers, businesses that use aluminum to manufacture products, and American consumers who buy these products," Klein said. While some analysts were upset at the requirement to sell Worsley, Prudential Securities' J. Clarence Morrison said they shouldn't have been surprised by the terms.

"There's nothing on here that really wasn't anticipated in one way, shape or form," Morrison said.

Alcoa said that while the acquisition may result in some layoffs, the vast majority of Reynolds 19,000 employees will keep their jobs.

Most of the job losses are expected at Reynolds' Richmond, Va. headquarters, which employs nearly 1,200. About 450 of those positions, related to Reynolds' packaging business and its information technology staff, will be retained.

The remaining workers will be eligible for jobs at other Alcoa locations, an Alcoa spokeswoman said.

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