Alcoa chases Alumina for $3.4bn deal

China’s CITIC will be the kingmaker in Alcoa’s $3.4bn scrip bid for Alumina, with the Chinese state-controlled giant yet to indicate its view on whether it will sell into the deal.

Alcoa Australia's Kwinana alumina refinery in Western Australia.

China’s CITIC will be the kingmaker in Alcoa’s $3.4bn scrip bid for Australian joint venture partner Alumina, with the Chinese state-controlled giant yet to indicate its view on whether it will sell into the deal.

Alcoa launched its takeover offer in ASX-listed Alumina Limited on Monday in an all-scrip deal that values its target at $US2.2bn ($3.4bn).

The deal will unify Alcoa’s global assets, given Alumina owns 40 per cent of the Alumina World Alumina and chemicals business – which includes a suite of key assets in Australia, Brazil, Guinea, Saudi Arabia and Spain.

The Australian assets in the AWAC group include an operating share in Victoria’s Portland aluminium smelter, two alumina refineries in WA, plus associated bauxite mines on the outskirts of Perth.

Alumina directors are set to back the deal, which offers shareholders 0.02854 Alcoa shares for each Alumina Limited share.

Based on NYSE-listed Alcoa’s closing share price of $US26.52 as of February 23, the agreed ratio implies an equity value of about $US2.2bn ($3.35bn) for Alumina.

The offer represented a 13.1 per cent premium to Alumina’s last trading price, but “implies a 19.5 per cent premium based on the average exchange ratio over the last 12 months”, the company said.

Alumina’s Gladstone refinery in Queensland.

The deal will also be subject to an independent expert concluding the transaction is in the best interests of Alumina shareholders, who will own 31.25 per cent of the combined entity if the deal goes ahead.

Alumina’s largest holder, Allan Gray Australia, has already backed the deal, entering into an agreement that gives Alcoa the right to acquire up to 19.9 per cent of Alumina.

That leaves China’s CITIC as the likely kingmaker in any transaction with the giant conglomerate. It holds about 19 per cent of Alumina’s stock, and yet to indicate support for the transaction. Other than the headline share ratio, formal terms of a deal have not yet been agreed, although Alumina has entered into a transaction process and exclusivity deed with Alcoa, granting it a 20-day exclusivity period.

But the two companies flagged their intention to use a scheme of arrangement as the vehicle to close the transaction. Such schemes which generally require the support of about 75 per cent of shareholders at a company meeting to close. Given not all shareholders vote at such meetings, a stake of around CITIC’s size would generally be enough to block such a vote.

Alcoa president Bill Oplinger told analysts on Monday that both Alcoa and Alumina had engaged with CITIC during discussions over the takeover, but hinted that authorities in Beijing may have the ultimate say on whether the Chinese major backs the deal.

“They have a process and procedure of getting approval for these types of transactions. And I’m sure they will go through that process,” he said.

Alumina has only one other substantial shareholder, Schroder Investment Management Australia, which holds about 7.8 per cent of the company’s shares.

Alumina has no operating role in any of its assets held jointly with Alcoa, and its main function over the years has been to pass on a share of AWAC’s profits to its own shareholders.

Alumina will declare its annual results and 2023 final dividend on Tuesday. Picture: Liam Kidston

That dividend stream has delivered extraordinary returns at times of strong aluminium and alumina prices but has dried up somewhat in recent years as the assets it co-owns went through a reinvestment phase amid volatile commodity prices.

Alumina will declare its annual results and 2023 final dividend on Tuesday. It paid US4.2c a share in dividends in 2022 and did not declare an interim dividend at its half-year results in August 2023.

In 2018 the company paid out US22.7c a share, fully franked.

Franking credits may pose a barrier to smaller shareholders accepting the deal, given an Alcoa takeover would effectively mean the $488m worth of franking credits held within Alumina could not be attached to any dividends paid to Australian shareholders, even though the US industrial giant will establish a secondary listing on the ASX using Chess Depositary Interests (CDIs).

Instead Alcoa argues that accepting the transaction will streamline its internal structure and put better growth options on the table for shareholders in a combined company, cutting Alumina’s own corporate costs immediately and potentially stream­lining the company’s tax affairs and borrowings, given Alumina carries its own debt when contributing cash towards AWAC’s assets.

“As we look forward, this gives us a tremendous amount of flexibility on how we can manage the operations,” Mr Oplinger said.

While Alumina shares surged on the back of the offer on Monday, some analysts questioned the price on offer, with Citi analyst Paul McTaggart saying the premium on offer looked “modest”. He said it raised “the question as to what the board’s baseline assumptions are for the WA assets?”.

Alumina shares closed up 7c to $1.09 on Monday.

Originally published as Alcoa chases Alumina for $3.4bn deal