Michigan Avenue Partners has a message for Alcoa Inc. and Reynolds Metals Co.: Don’t celebrate your merger plans, because we aren’t going away.
Reynolds late Wednesday accepted a $4.4 billion takeover bid from Alcoa, which would create a $20.5 billion global powerhouse in the aluminum industry. The agreement appears to ace out Michigan Avenue Partners, a Chicago-based private investment firm that last week made its own bid for Reynolds.
“This isn’t over. It’s far from over,” vowed Michael Lynch, chairman of Michigan Avenue Partners, in an interview with the Tribune. “I don’t intend to lose this Reynolds battle.”
But Lynch would not explain what firepower the partnership has to thwart the Alcoa-Reynolds deal.
Under its deal with Alcoa, Reynolds has 30 days to solicit a better offer; but Reynolds would have to pay a $100 million breakup fee if it backed out of the deal.
Alcoa originally launched a hostile offer of $65 a share in cash and stock, which Reynolds rejected as too low. Michigan Avenue Partners swooped in with an all-cash offer at $65 a share.
“We said we could produce a higher tender offer, subject to financing commitments, for Reynolds,” Lynch said. “But we requested additional information for due diligence to proceed with a higher offer.”
Instead, Reynolds entered into talks with Alcoa, resulting in an all-stock deal that values Reynolds at about $70.88 a share, based on Wednesday’s closing price of Alcoa. Reynolds shareholders will receive 1.06 shares of Alcoa stock for each Reynolds share.
The agreement raises enormous antitrust questions, but Reynolds and Alcoa said they hope to consummate the deal by the end of the year.
Alcoa, based in Pittsburgh, is the world’s No. 1 maker of aluminum. Richmond, Va.-based Reynolds is No. 3 in North America.
Together, the companies would control more than one-sixth of the world’s aluminum production, analysts say. The combined company would have annual sales of $20.5 billion, with 120,000 employees in 36 countries.
The merger is eye-catching because it comes on the heels of another huge deal in the industry: the combination of Canada’s Alcan Aluminum Ltd., the second-largest producer in North America; Pechiney S.A. of France; and Alusuisse-Lonza Holding (Algroup) of Switzerland. Those companies have combined sales of about $21 billion a year.
Economics is behind the mega-mergers. The former Soviet Union was one of the world’s biggest producers of aluminum.
When that country’s government collapsed, resulting in economic chaos, producers dumped aluminum on world markets in a desperate effort to get foreign currencies. That drove down worldwide prices.
Then economic downturns in Asia and Latin America caused demand to plummet, further depressing prices. Aluminum producers began scrambling for ways to cut costs.
An Alcoa-Reynolds merger “will permit the greater efficiencies and cost reductions required by an environment that has seen the lowest prices in many years for our commodity products,” said Alcoa’s chief executive, Alain J.P. Belda.
Economics withstanding, such broad-scale consolidation surely will put the Alcoa-Reynolds deal under intense antitrust scrutiny, predicted Steve Newborn, a former mergers attorney with the Federal Trade Commission. He now heads the antitrust division at the Rogers and Wells law firm in Washington.
“You’re talking about an industry where any reduction of capacity to produce aluminum can have a direct impact on prices,” Newborn told The Associated Press.
Lynch was more blunt. “We view it as anti-competitive and anti-American. Someone besides Alcoa should own this thing. You’ve now got aluminum being controlled by two players worldwide.”
Michigan Avenue Partners already is a player in the aluminum industry, but had planned to use the Reynolds acquisition to move into the top tier.
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The five-member investment firm originally operated as a commercial real estate developer and got into the aluminum industry via the back door. The firm bought the west suburban McCook manufacturing plant from Reynolds, looking at the 3.2 million-square-foot facility more as a real estate opportunity than a manufacturing one.
But in a year’s time, under Michigan Avenue Partners’ ownership, the plant quadrupled its profits, Lynch said. The plant, renamed McCook Metals LLC, is second only to Alcoa in aluminum plate production in North America.
The partnership decided aluminum was a good business and in short order acquired Metro Metals Corp., which has operations in Portage and East Chicago, Ind., and a rolling mill in Scottsboro, Ala.
Today the partners control about $1 billion in aluminum assets, and the goal is to grow.
Lynch, saying the partnership intends to continue the fight to acquire Reynolds, said the intent is to run it as a separate company. He said the partnership has enlisted additional investors to finance the acquisition, but would not identify them beyond describing them as “economic firepower.”
In announcing its original bid for Reynolds, Lynch said he was confident that financing could be arranged through McCook Metals.
On Thursday, Lynch was huddled with the partnership’s attorneys and financial advisers.
If the Reynolds effort fails, it will be the third deal for the partnership to go bust in recent months.
Last year, with great fanfare, Michigan Avenue Partners tried to buy Evansville Brewing Co. in Evansville, Ind., which had filed for bankruptcy after 147 years in business. But financing fell through. The brewery’s brands were sold to a rival, and its physical assets were auctioned.
The partnership and an outside investor are suing each other over $250,000 in earnest money forfeited in the failed attempt, Lynch said. “That’s my only bad deal,” he said.
The group owns a vintage building at 36 S. State St. Original plans were to convert it to a Red Roof Inn, but those plans have fallen through.
Lynch said the partnership has other plans for the building.
Michigan Avenue Partners has roots mostly in the real estate arena.
Lynch worked for CB Commercial Real Estate Services–today called CB Richard Ellis–before forming the partnership.
At CB, he met Dominick Forte and Matt Ochalski, now respectively head of real estate and chief operating officer of Michigan Avenue Partners.
John Koleing, who has a banking and real estate background, is vice chairman of the partnership. Jim McCall, former chief financial officer of Quaker Oats Co., holds that title with Michigan Avenue Partners.
But Lynch is the public face of the investment group.
Jeff Barrett, managing director at CB Richard Ellis, said, “These are very smart guys. When I knew them they were strictly in the commercial real estate business.”
He described Lynch as “a very ambitious guy. A little flamboyant. Obviously he thinks big.”
He also was a very hard worker, Barrett said. “He’d work extreme hours. He was a very high-energy kind of guy.”
Others note that Michigan Avenue Partners didn’t make much of a splash in the real estate arena.
And one industry leader, who didn’t wish to be identified, said Lynch wasn’t particularly successful as a real estate broker. “That’s probably why he’s smart to get into the aluminum business.”
He described the Michigan Avenue group as “cowboys, not really corporate types,” adding: “I’m surprised they’re able to be an operating company, not just take assets and flip them over.”