Megamergers reshape supply landscape
By Tom Stundza -- Purchasing, 10/7/1999
A flurry of mergers this summer has shaken the aluminum industry. But it's not surprising in a world increasingly made up of giant companies in such industries as oil and automobiles, according to Ilker Baybars, senior deputy dean at the Carnegie Mellon University's Graduate Business School in Pittsburgh.Baybars says "megamergers" are aimed at keeping the surviving companies competitive by cutting costs through reducing work forces, consolidating purchasing and sales activities, and improving productivity. A contributing factor revolves around a series of global shocks the aluminum industry has been battered by in the past decade.
The collapse of the Soviet Union led to a massive supply glut in the early 1990s, as Russian smelters that had served the Soviet military diverted low-priced aluminum onto the world market. Just as the industry was beginning to recover from that overhang, global demand was dented by the economic slowdowns in Asia, which accounts for about 20% of world consumption, and in Latin America.
The price of aluminum ingot on the London Metal Exchange, a key factor in industry profits, tumbled from 82¢/lb in 1995 to 68¢ a year later. Since then, suppliers have struggled with ups and downs. So far this year, LME average price is 60¢.
Since aluminum is a global commodity, analysts have been saying for months that only a major world rationalization, or consolidation, of major suppliers could better coordinate production with supply and allow LME prices to rise. Remember that just about every spot and contract price for an aluminum mill product is based on or reflects the previous month's LME price average for primary ingot. Worldwide, the capacity to make aluminum far exceeds the demand, says Robert Dammon, a finance professor at Carnegie Mellon. "The reason these firms are merging is to consolidate operations, and you are going to have smelting plant closings; it's going to happen." Here's a look at the two aluminum megamergers of 1999:
Alcoa still the biggest
Solidifying its hold as the top global aluminum company, Alcoa Inc. of Pittsburgh is buying Reynolds Metals Co., the Richmond, Va., aluminum, packaging, and metals distribution company, for $4.4 billion. The deal unites two storied companies: Alcoa is the world's oldest aluminum manufacturer (the company made engine parts for the Wright Brothers' plane). Reynolds was instrumental in marketing the first aluminum soda cans and later created flip tops that stay with cans after opening.
Alcoa had $15.3 billion in revenue last year. It is the world's largest producer of alumina, the principal ingredient in aluminum. Reynolds, with $5.9 billion in sales revenue last year, has operations in 24 countries. It also processes and distributes aluminum and stainless steel through its Reynolds Aluminum Supply Co. (Rasco) subsidiary.
A new analysis by CRU International says that the two firms this year will produce a total of 3.8 million metric tons of aluminum ingot, or just over 22% of expected world supply. CRU also says Alcoa/Reynolds are expected to produce and ship more than 3 million tonnes of flat-rolled aluminum.
The larger Alcoa will have about 120,000 employees operating in over 300 locations in 36 countries. According to analyst Daniel A. Roling at Merrill Lynch, "Alcoa will be well-positioned to participate in the ongoing globalization of the aluminum industry because it will be able to achieve operating efficiencies and cost savings, internally, as well as from suppliers." That's because the Reynolds operations will be merged into Alcoa, which recently instituted what it calls the Alcoa Business System, an efficiency drive that pushes plants to produce more, produce it faster, and keep inventory to a minimum. "Alcoa has already cut costs," says industry analyst Thomas M. McNamara of cibc World Markets. "The management started earlier and set the benchmark for the rest of the industry." Alcoa execs project $200 million in pre-tax cost and efficiency savings by the end of the second year.
Alain J. P. Belda, Alcoa's president and CEO, hopes the Reynolds takeover will be completed by year-end 1999. However, "Alcoa is likely to encounter headwinds with the trustbusters," suggests analyst David Moison at Metals Research Inc. He thinks regulators will be concerned whether the merger will mean higher prices for customers. Belda believes the Alcoa-Reynolds merger will survive an anti-trust review because of global industry consolidation.
Belda says, "there is an obvious complementary fit between our companies that will create a new company which will be better positioned to address the ongoing globalization of the metals industry and the new competitive landscape this is creating." The Alcoa CEO also tells reporters and analysts in a conference call that "the merger will permit the greater efficiencies and cost reductions that are required by an environment that has seen the lowest prices in many years for our commodity products."
APA is the new No. 2
The $9.2 billion merger of Alcan Aluminium of Canada, Pechiney of France, and Alusuisse-Lonza Holding (Algroup) of Switzerland will take until at least next February to be completed. When it happens, the new Alcan-led firm will control everything from bauxite mines to aluminum smelters to packaging plants. In fact, the new company, initially to be called APA, will be the second-largest aluminum company worldwide (after Alcoa) and will control 2.74 million metric tons (or about 15%) of global primary aluminum smelting capacity. However, it will be the global leader in both flexible and specialty packaging. Going into the merger, Alcan is the second-largest world aluminum company; Pechiney is the fourth biggest.
After the merger, Alcan shareholders will own roughly 44% of the combined company, Pechiney's stockholders will own 29%, and Algroup's investors will hold 27%. The new group would have had combined revenue last year of $21.6 billion from aluminum smelting and packaging businesses in 59 countries. Planned consolidations of commercial, purchasing, administrative, and research and development activities should lead to cost savings of at least $600 million within two years, according to Jacques Bougie, Alcan CEO. Algroup CEO Sergio Marchionne expects a 5% cut in overall staff numbers, or about 4,550 of the three companies' combined staff of 91,000.
The combined Alcan-Pechiney-Algroup company is being registered in Montreal, but will operate out of New York City. Bougie will lead the new company as chairman and CEO through 2001, and then turn it over to Jean-Pierre Rodier, Pechiney's chairman, who for now will be APA's president and COO. Alcan's U.S. operations are coordinated by Alcan Aluminum Corp. in Cleveland, while Pechiney's major U.S. operation is American National Can.
On the basis of 1998 figures analyzed by Bougie in a conference call with reporters and analysts, $4.6 billion of APA's would have come from the production of primary aluminum, with $9.3 billion from fabricated products used in construction and other aluminum-using industries. Of the rest, $4.2 billion originates in making packaging and $3.5 billion comes from trading.
"The APA consolidation makes a lot of sense," says analyst Mark Horn at T. Hoare Canaccord. "Alcan had to get itself back on the growth track having focused on cost-cutting for some months now, and Pechiney and Algroup were too small to compete with larger global rivals." Note that as part of the transaction, Algroup plans to spin off its chemical and energy activities, creating a new company called Lonza Group Ltd.
A new analysis by CRU International says the three firms that will become APA this year will produce a total of 2.57 million tonnes of aluminum ingot, or just over 15% of expected world supply. CRU also says the three firms combined are expected to produce and ship more than 3.2 million tonnes of flat-rolled aluminum, which actually is more than the 3 million tonnes expected to be supplied by Alcoa.
According to several analysts, this APA combination could help the global aluminum industry better cope with swings in supply and demand. For instance, while all three makers might decide to build new smelters when demand picks up, the combined company could choose to build just one.
One of the hurdles the companies must face is on the regulatory front, where the deal is being scrutinized by the Justice Department and the European Union Commission. However, in a bid to head off any potential problems, CEOs of the three firms actually briefed EU Commission's anti-trust regulators before the merger was announced. Rodier says he is "highly confident that we'll pass through the competition review process without much problem."
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