Fitch Ratings has lowered Alcoa Inc.'s (NYSE:AA) debt ratings and placed the debt on Rating Watch Negative for possible further downgrades, following Alcoa's announcement that it has made an unsolicited offer to acquire all of the outstanding shares of Alcan Inc. (NYSE:AL) for US$58.60 in cash and 0.4108 of a share of Alcoa common stock for each outstanding common share of Alcan. The cash portion of the bid is about $21.5 billion and is supported by a commitment letter from Citi, Goldman Sachs Credit Partners L.P. and Goldman Sachs Canada Credit Partners Co. to fully finance the proposed transaction. Alcoa's ratings have been lowered as follows:
--Issuer Default Rating (IDR) 'A-';
--Senior unsecured debt 'A-';
--$3 billion Revolving Credit Facilities 'A-';
--Commercial Paper 'F2'; and
--Preferred stock 'BBB+'.
The transaction is subject to customary regulatory and shareholder approvals and Alcoa expects to complete it by the end of 2007. The combined EBITDA of the companies for 2006 was $9.5 billion and total debt assuming that the cash portion of the bid is all debt financed and before any asset sales would be $35 billion. Debt to capital, with the same assumptions becomes about 65%.
Alcoa has stated that they expect synergies of $1 billion per annum to be fully realized in the third year after closing and that the transaction is expected to be accretive to earnings and cash flow in the first year after closing. One time implementation costs are expected to aggregate $1 billion. Alcoa's capital expenditure guidance was $3 billion to $3.2 billion and Alcan's was $1.9 billion for 2007. Alcoa expects the combined company will generate substantial free cash flow that will enable it to rapidly reduce acquisition-related debt, while continuing to invest in growth opportunities. Alcoa states that it is committed to maintaining an investment grade status.
Fitch expects that a combination of operations of the two companies will give rise to opportunities for rationalizing operations and for efficiencies in capital budgeting. Alcoa and Alcan have been consolidators in the aluminum industry in recent periods but none of the past transactions were on this scale or with this financial leverage. A multi-notch downgrade is likely if the transaction takes place with the debt levels considered and a non-investment grade rating is possible depending on the financing structure, asset sales program and operating strategy.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
