By Melanie Burton and Echha Jain
MELBOURNE (Reuters) -U.S. aluminium producer Alcoa (NYSE:AA) on Monday made a $2.2 billion all-stock buyout proposal for its Australian joint venture partner Alumina (OTC:AWCMY), in a deal that would give it greater upstream exposure and simplify its operations.
Alumina's only asset is a 40% stake in the Alcoa World Alumina and Chemicals (AWAC) joint venture, which is controlled by Alcoa and has interests in bauxite mining, alumina refining and aluminium smelting across Australia, Brazil, Spain, Saudi Arabia and Guinea.
Alcoa CEO William Oplinger told analysts the deal would eliminate Alumina's A$12 million ($7.87 million) a year of overhead costs and allow the combined company to tap tax advantages related to holding debt.
The broader global footprint will also allow Alcoa more options for growth, he added.
Under the proposed deal, Alumina shareholders would receive 0.02854 shares of Alcoa common stock for each share held, giving them a 31% stake in the combined company. This would imply a value of A$1.15 per Alumina share, based on Alcoa's closing price as of Friday.
Alumina shares closed 7 Australian cents higher at A$1.09 on Monday. Alcoa's shares were down 2.9% in U.S. premarket trading.
Melbourne-based Alumina said its board backed the deal in the absence of a superior offer, though it also noted there was no certainty the proposal would be made binding.
Alumina's largest shareholder, investment manager Allan Gray Australia, holds just under a 20% stake in the company, which it said it had agreed to sell to Alcoa.
"To a very large degree it simplifies the corporate structure," portfolio manager Simon Mahwhinny of Allan Gray said of the deal.
Alumina was created from a 2002 de-merger of WMC Ltd's alumina assets and an Alcoa buyout has been viewed as logical by analysts for more than two decades.
AWAC also has a 55% interest in the Portland aluminum smelter in Australia with China's CITIC Resources and Japan's Marubeni.
CITIC Resources and other subsidiaries of its parent CITIC Ltd hold a combined 19% stake in Alumina, according to CITIC Resources' 2023 interim report, making the Chinese group the second-largest shareholder. CITIC did not respond immediately for a request for comment on whether it backed the Alcoa offer.
"We believe this transaction makes strategic sense, but the economic upside to Alcoa is offset by the premium paid," Jefferies analysts in a note on Alcoa.
"We would expect shareholders of both companies to vote for this transaction, although this is not certain as AWC shareholders may be disappointed by the relatively small premium in an all-share deal."
The deal offered a 13% premium to Alumina's last closing price, below more typical takeover premiums of about 30%.
The Alcoa proposal comes at a tough time in the alumina industry due to low prices.
Alcoa said in January it planned to stop production this year at AWAC's loss-making Kwinana alumina refinery in Western Australia due to challenging market conditions and the facility's age.
($1 = 1.5256 Australian dollars)