Aluminium deal raises competition fears

Date: 02/09/1999

By Renée Cordes

ANALYSTS are predicting that aluminium makers Pechiney, Alcan and Algroup will be forced to trim some sales and production activities to win EU regulatory clearance for their €20-billion trans-atlantic merger.

France's Pechiney, Canada's Alcan Aluminium and Algroup of Switzerland announced a mega-merger last month which would topple Alcoa as the world's top aluminium producer. It would also create the world's leading maker of speciality packaging for products such as cosmetics, cigarettes and food.

The combined company, called Alcan-Pechiney-Algroup (APA), had combined sales and operating revenues of €23 billion in 1998, and aims to achieve €630 million worth of annual cost savings within the next two years. Alcan shareholders would get 44% of APA shares, Pechiney shareholders 29% and Algroup shareholders 27%.

Algroup's chief executive Sergio Marchionne said the deal would create a "new global powerhouse" in aluminium and packaging, and Pechiney's chairman and chief executive Jean-Pierre Rodier described it as a "bold and logical step in two consolidating industries".

The companies have said that they may reduce their combined 91,000-strong global workforce by 5%, but have so far refused to reveal where the cuts would be made.

Industry experts predict that APA will be forced to close some production plants in Europe and eliminate sales overlaps to address European Commission competition officials' concerns about the firm's dominant position as a leading supplier of aluminium products to the aerospace, automotive and beverage can industries.

"There may be one or two problems with some downstream activities," said John Martin, a consultant at London-based CRU International, referring to products such as laminated sheets as opposed to basic aluminium.

He said APA would have about 50% of the European market for canned sheet, the material used to make beverage cans, but added that this was not a long-term concern as European drinks-can makers also use other substances such as tin.

APA may, however, be forced to close down some factories supplying industries such as the aerospace sector, where it has a 25% market share, and the car industry, to answer Commission concerns.

"Together the companies will be the leader in supplying aluminium to the aeronautical and automobile sectors, two of the fastest-growing markets," said Luc Pez, an analyst at ING Barings in Paris. APA would be Airbus' leading supplier and Boeing's second supplier, while Alcan already has a large contract with General Motors.

Company executives have already held preliminary talks with Commission officials, although they have not yet formally notified the institution of the merger. Once they do, the Commission will have a month to deliver its preliminary verdict. Regulatory approval will also be required from Canada, Switzerland, France and possibly the US.

Like many other heavy industries across Europe, aluminium producers are increasingly looking to mergers to cut costs and remain competitive. Analysts expect this trend to continue as aluminium prices languish at five-year lows, putting pressure on revenues and driving shipments down.

In July, the Commission granted unconditional clearance to British Steel's purchase of Dutch steel and aluminium producer Hoogovens. Competition officials had initially been concerned that the merged company, along with rivals Usinor and Thyssen-Krupp, would control 90% of the market for the tinplate used to make beverage cans.

Even if the Commission does approve the three-way aluminium tie-up with conditions, as expected, industry experts say that regulators will continue to keep a close eye on the sector.

"The move towards consolidation will continue, and companies who are able to grow through mergers will be in a very strong position," said ING'S Pez.