Customers feared marketing power of European aluminum giant

When the deal was hatched last summer, it was a world-class merger that fit the times. After all, there was intense global consolidation going on in steel, oil, chemicals and automobiles. So why not in aluminum?

In a smart brochure they produced explaining their plan to create the world's largest aluminum and packaging firm, the three chief executive officers involved -- Jacques Bougie of Montreal-based Alcan Aluminium Ltd., Jean-Pierre Rodier of France's Pechiney SA and Sergio Marchionne of Swiss-based Alusuisse Lonza Group AG (Algroup) -- claimed their unique three-way tie-up was customer-driven.

Their big clients wanted to deal with a single global company that could offer low, stable prices and invest heavily in technology and new products. With 90,000 workers worldwide and annual sales of $21-billion (U.S.), APA (Alcan-Pechiney-Alusuisse) would be that company, shunting aside the aluminum industry's long-time No. 1, Alcoa Inc. of Pittsburgh.

Their argument seemed to have force. Certainly it registered at Alcoa, which almost instantaneously announced a $5.6-billion merger with Reynolds Metal Co. of Richmond, Va. It also won over the investment community who had long seen aluminum as a sector in need of what Mr. Bougie of Alcan called "a global redesign."

The industry worldwide had been plagued for years with too much capacity and falling prices. Moreover, the authors of its woes -- low-cost Russian suppliers desperate for hard currency -- could be counted in no one's camp.

Back in the 1950s and 1960s, it was true that a few companies had controlled much of the world market (Alcan is itself the product of an antitrust breakup of Alcoa by the U.S. Justice Department). But that, certainly, could not be said of the 1990s. Exclude the markets of Russia and China and the APA trio would have just 18 per cent of world capacity. "These companies couldn't control prices even if they wanted to," said New York metals analyst, Stewart Spector, publisher of the Spector Report.

As it has turned out, the question of fixing prices has never surfaced. Instead, the reasoning behind the European antitrust authority vetoing the APA deal was that it created "market dominance."

Moreover, when push came to shove, the three amigos could not agree on who should give up what to placate Brussels. In their brochure they had talked of a "compelling new future together." After yesterday's decision to withdraw the deal, Alcan and Pechiney will go their separate ways.

Back in March, Alcan was permitted by European Competition Commissioner Mario Monti to go ahead with its lesser $4.1-billion linkup with Algroup. However, any Alcan-Pechiney tie-up hinged on either Alcan selling its valued stake in the Alunorf rolling mill in Germany or Pechiney giving up a rolling mill at Neuf-Brisach in France. Alcan balked. And so did Pechiney's management in Paris.

Effectively, this ended the last slim hope that had existed of the group resubmitting a revised merger to Brussels. When Mr. Monti made his ruling on the merger, he said the firms could come back with a modified plan. But unless the deal was "remarkably changed" from the old one, it would be "a sterile exercise."

From the beginning, it was clear that APA would face the greatest scrutiny in Europe. However, something unexpected happened. Mr. Monti was sworn in as the new Competition Commissioner and declared he would look far more closely at mergers that created "collective market dominance" by a few companies.

A main APA argument was that, although they had nearly half the market for canned sheet used to make beverage cans, this should be set against use of other materials like steel sheet. In which case, their market share came down to 20 per cent.

In the end, APA was not just the victim of a Competition Commissioner in Brussels taking a clearer, tougher line, it was also the subject of fierce criticism by the clients and customers whom the three CEOs had counted on for support. In his ruling, Mr. Monti made clear that -- when contacted by Brussels -- many APA customers expressed alarm at the size and marketing power a Canadian-French-Swiss aluminum giant would wield in Europe.

Merger torn apart

The planned three-way merger between Alcan Aluminium Ltd., Alusuisse Lonza Group Inc. and Pechiney SA is officially dead, leaving only a two-way deal involving Alcan and Alusuisse. Alusuisse Lonza Group
General Director: Sergio Marchionne Switzerland symbol: ALUN Head office: Zurich Employees: 29,471 Operations: Is a diversified manufacturing company. The company manufactures packaging for the food and pharmaceutical industry. Alusuisse (Algroup) also produces raw aluminum metal and processed aluminum, as well as fine chemicals. The company is active in the trading of raw materials. Alcan Aluminium
President and CEO: Jacques Bougie TSE symbol: AL Head office: Montreal Employees: 38,000 Operations: Is a multinational company involved in all aspects of the aluminum industry. The Company produces flat-rolled aluminum products and has operations and sales offices worldwide. Alcan, through its subsidiaries, mines for bauxite, refines alumina, generates power and manufactures and recycles aluminum. Pechiney SA
Chairman and CEO: Jean-Pierre Rodier France symbol: PEC Head office: Paris Employees: 33,155 Operations: Produces aluminum, aluminum semi-finished products and packaging materials. The company produces primary aluminum, beverage cans, plastic packaging and tube packaging. Pechiney produces ferroalloys and operates an international trade business.