Alcoa offered to buy out an Australian aluminum partner for $2.2 billion, increasing its weight in the global markets for alumina and bauxite—raw materials used for making aluminum.
The company will buy Alumina Limited, which it works with in Australia and Brazil. It’s an all-stock deal. Alumina shareholders are set to get 0.02854 Alcoa share for each Alumina Limited share. That implied a value of 1.15 Australian dollars per Alumina share, a premium of about 13%, based on closing prices on Friday.
The deal values Alumina stock at about $2.2 billion. If the transaction proceeds as envisioned. Alcoa shareholders will own about 69% of the combined company. Alumina will own about 31%.
Alumina’s board recommended that its shareholders support the deal, Alcoa said in a statement on Sunday. Alumina had rejected a number of previous bids from Alcoa.
“Buying Alumina would consolidate the 40% of Alcoa’s bauxite and alumina assets that it does not own,” wrote Citi analyst Alexander Hacking. “From a strategic perspective, this makes sense.”
Some of the benefits include more vertical integration—Alcoa will have more control over its needed upstream raw materials. It also simplifies corporate structures, resulting in lower costs.
Shareholders seem OK with the transaction. Alumina stock was up about 7% in overseas trading at $1.09. Alcoa stock was down 2.3% in premarket trading Monday, at $25.9, while S&P 500 and Dow Jones Industrial Average futures were both down about 0.1%.
Some drop in an all-stock deal isn’t all that surprising. Investors don’t like seeing extra shares issued. What’s more arbitrage traders will try to lock in a spread by buying the target and selling shares of the acquiring company. At current prices and exchange rates, Alcoa’s premarket stock price implies 1.12 Australian dollars per Alumina share. The spread is 3 cents or about 3%.
Shares of Alcoa’s competitors were mixed. American depositary receipts for mining giant Glencore were up 0.2%. Reliance Steel and Aluminum shares gained 0.2%, and shares of Century Aluminum were up 0.3%.