Independent expert report says Alcoa’s $4bn bid for Alumina is ‘fair and reasonable’

Shareholders should back Alcoa’s $4bn bid for Alumina, says an independent expert report despite the ‘loss’ of $500m worth of franking credits.

Alcoa is closing its Kwinana alumina refinery in Western Australia.

Alcoa’s $4bn takeover offer for ASX-listed Alumina is fair and reasonable, according to an independent expert’s assessment of the all-scrip offer.

Local shareholders are set to vote on the scheme on July 18.

The deal, if accepted, will finally consolidate Alcoa’s ownership of the AWAC joint venture – including key West Australian bauxite mines and alumina refineries that Alcoa and Alumina currently share under a 60:40 joint venture.

The offer has been backed by the Alumina board, and an independent expert report prepared by Grant Samuel valued Alumina’s 40 per cent stake in Alumina at $US2.4bn to $US2.9bn – or about US82c to US98c a share.

The accounting firm said the all-scrip deal would deliver a substantial benefit for Alumina shareholders in the future as the notoriously inflexible joint venture agreements between the two companies are unwound.

Under the deal Alumina shareholders would emerge with about 31.6 per cent of the combined company. Alcoa is offering 0.02854 of its own shares for each Alumina share on issue, or about $US1.17 a share at the $US41.16 Alcoa last traded at.

The deal has the support of Allan Gray, Alumina’s biggest shareholder with a 19.55 per cent holding, and China’s CITIC which holds 19 per cent. Alcoa agreed to a carve-out to allow CITIC to take some of its shares in the US-listed metals giant as non-voting stock to avoid triggering US laws that prevent the Chinese giant from holding more than 5 per cent of voting stock in any US public company.

But, while the Grant Samuel report recommends the deal is in the best interest of all Alumina shareholders, it notes that retail investors would lose access to the company’s $493m worth of franking credits, which are often considered a valuable asset for self-managed superannuation funds and smaller shareholders.

Grant Samuel discounted the value of the franking credits, however, noting that Alumina had not paid a dividend in Australia since June 2022. Alumina suspended the payments as the market for the industrial metal headed south.

“Shareholders need to recognise that the outlook for dividends from Alumina in the short term is highly uncertain given the expected cash demands over the next few years and the likely need to reduce Alumina’s gearing,” the report said.

Owning a US-listed stock also carries its own risks, but Grant Samuel said any downside for shareholders was more than outweighed by the “compelling” strategic merits of unifying the AWAC business.

“The current ownership structure of AWAC is suboptimal and not “fit for purpose”. It is inefficient, with the shared ownership of AWAC diluting value and resulting in additional costs and extra layers of decision making,” the report said.

“The weaknesses of the current structure have been brought into sharp focus by recent performance issues at AWAC that have resulted in the partners (Alcoa and Alumina) having to make significant cash contributions over the last two years. Further contributions are expected over the next 1-2 years.”

Alumina shares closed down 8.4c to $1.74 on Tuesday amid broader falls in mining and metals stocks.