Russia's leading aluminum firm, RUSAL, will take over its main competitor SUAL and the aluminum industry assets of Glencore to create the world market leader, a source close to the deal told Reuters on Wednesday.
The transaction, which may be finalized by October and create a company worth around $30 billion, would confirm Russia's renaissance as a world powerhouse in energy and strategic commodities after the post-Soviet economic collapse.
The new company will be the world's number one aluminum producer with output of 4 million tonnes per year, and also the top alumina producer with output of 11 million tonnes, the source said, on condition of anonymity.
RUSAL, SUAL and Swiss commodities trading house Glencore all declined to comment. RUSAL is currently the world's third-largest aluminum producer after U.S. Alcoa Inc. and Alcan Inc. of Canada.
The Financial Times estimated the value of the deal at $30 billion and said the combined company would be chaired by Brian Gilbertson, the head of SUAL, and run by Alexander Bulygin, who is chief executive of RUSAL.
Completion of the takeover would crown RUSAL's 38-year-old owner, Oleg Deripaska, as Russia's undisputed aluminum king after a long and often brutal struggle for control of industry assets in the 1990s known as the 'aluminum wars'.
Deripaska, Russia's sixth-richest man with a fortune is estimated at $9 billion by Forbes magazine, has excellent establishment connections, he is related by marriage to former President Boris Yeltsin.
He met President Vladimir Putin for one-on-one talks earlier this month, and is likely to have received Putin's blessing for the aluminum deal to go ahead.
Banking sources told Reuters that UBS and JP Morgan were advising on the deal. UBS and JP Morgan declined to comment.
The new company would be listed on the London Stock Exchange within three years, according to a non-binding agreement signed by the three parties last Friday and seen by the FT.
RUSSIA INC. GOES GLOBAL
Putin has capitalized on booming oil and commodities prices as a means to recover Russia's lost status as a great power. A national aluminum champion would join state-controlled gas monopoly Gazprom in projecting power abroad.
If it materializes, the RUSAL-SUAL deal would be another sign of Russia Inc. expanding in the world, said Bob Foresman, deputy chairman of Russian investment bank Renaissance Capital and a seasoned investment banker on the Russian scene.
Russian strategic sectors, represented by mammoth companies that are leaders in their industries, are asserting themselves on the world stage, Foresman added. This shouldn't be surprising, given Russia's great wealth and natural resources.
The FT and Swiss newspaper the Neue Zuercher Zeitung both reported that RUSAL would own 64.5 percent of the new firm, SUAL 21.5 percent and Glencore 14 percent.
The source said that Glencore would contribute its alumina refining assets to the new company, including Auqhinish refinery in Ireland, which it owns outright, and Windalco and Alpart in Jamaica, where it has 93 and 65 percent respectively.
It will also contribute its 44 percent stake in Eurallumina refinery in Italy and its wholly owned Kubikenborg Aluminum AB aluminum smelter in Sweden.
RUSAL produced 2.8 million tonnes of the metal last year, while SUAL produced 1.1 million tonnes. RUSAL has said it plans to raise its output to 5 million tonnes by 2013 and SUAL to 2.2 million tonnes by 2012.
Industry analysts said the reported $30 billion price tag on the deal appeared plausible. Moscow's Aton brokerage said that if the merged entity was priced in line with the global industry it would be worth nearly $29 billion.
Aton based its calculation on a global industry average of nine times enterprise value to EBITDA, or earnings before interest, taxation, depreciation and amortization. Enterprise value is a company's combined equity and debt.
Metals traders were sanguine, saying they did not expect industry concentration in Russia to disrupt aluminum trading.
I don't think anything like that will bother the physical market, whether this Russian company has 2 million and that Russian company has 2 million, or one Russian company has 4 million, said one London Metals Exchange trader.
RUSAL has just announced it will buy out minority shareholders in its operating companies, in a move analysts said would pave the way for the merger.