Monti urged not to foil aluminium deals

Date: 24/02/2000

By Peter Chapman

Wall Street analysts are warning EU competition watchdogs not to block planned aluminium mega-mergers, despite warnings from smaller rivals that they would leave nearly half of the world's production in the hands of just two new firms.

US experts argue that the deals are the only logical solution for an industry which has been suffering for years because of low prices and painfully poor returns on investment.

The plea comes as Competition Commissioner Mario Monti and his officials are finalising their investigation into the first of a duo of deals involving the industry's biggest companies.

Monti is expected to rule next month on the friendly take-over by Canada's world number-two producer Alcan Aluminium of France's Pechiney and Switzerland's Alusuisse to create a new company to be known as 'APA'.

That decision is expected to be followed in May by a ruling on the planned €4.2-billion merger between the world's number-one aluminium firm Alcoa and US rival Reynolds Metals.

A spokesman for Monti refused to speculate on the results of the two investigations, except to confirm that talks were continuing in a bid to find ways of allaying the institution's competition fears before the respective deadlines for the Commission to deliver its verdicts.

The EU executive voiced concerns in November over APA's increased power in the market for food packaging and products such as lithographic plates, beverage and food cans, automobiles and buildings. Since then, its fears about competition in the sector have been compounded by Alcoa's plans to merge with Reynolds, in a deal which would keep the US giant in the number-one spot.

This has prompted concern that the institution will either extract massive concessions or block the deals completely on the grounds that the combined firms would control too much of the world market for alum-inium products.

Brussels lawyers say the two deals would provide the next major test of a new, tougher Commission approach towards mergers which lead to the 'collective dominance' of a market by a few firms. This follows Monti's shock decision last October to block the merger of UK tour operators Airtours and First Choice on the grounds that it would have resulted in the UK market being dominated by just three companies.

Sources at the aluminium firms admit that they too fear Monti may take a hard line as he bids to show that he is not afraid of taking tough decisions in his new role as the EU's competition watchdog. But they are working hard to convince the Commis-sioner and his officials that the combined firms would face rivalry from producers of other metals such as steel.

"When Monti took over, he said he would take a keen interest in mergers," said Alcan vice-president Marcel Daniels. "Ours was the first one that was notified. By default, that means he was likely to look at it closely."

Wall Street analyst Dan Roling, of investment bank Merill Lynch, insisted this week that it would not be in the interests of customers if regulators forced the companies to sell off parts of their businesses to win regulatory approval. He also argued that there would be a host of rival firms ready to compete with the two aluminium giants if they tried to abuse their market power.

"Aluminium is one of the most common elements on the face of the earth. We are talking about a commodity business," he said.

John Turnazos, an analyst at Sanford C. Bernstein, predicted that Union regulators would call on Pechiney, Alcan and Alusuisse to leave some packaging product markets and sell some of their nine aluminium mills in Europe. "They do not need all nine and they might be doing themselves and their shareholders a favour if they dropped the bomb on some of them," he said.

But he denied that the newly-merged companies would wield too much market power. "These firms do not control the market. They face new competition from producers in Dubai and Oman, where new mills are being built. These are yesterday's companies."

Wall Street analysts are warning EU competition watchdogs not to block planned aluminium mega-mergers, despite warnings from smaller rivals that they would leave nearly half of the world's production in the hands of just two firms.