I find the combination of geography and political science fascinating. I'm especially interested in the effects of these two disciplines on our planet's ability -- or lack thereof -- to keep up with mankind's growing commodities needs. It's both amusing and sometimes frustrating that many of the nations with the biggest reserve positions in a lot of these commodities are all too often characterized by politics that are a combination of shaky, flaky, and downright scary.
So I think it's interesting that the likelihood of the success of Alcoa's (NYSE:AA) bid for its Canadian rival Alcan (NYSE:AL) appears also to be turning on geography. Indeed, late last week The Wall Street Journal said that, "... an Alcan bid (for Alcoa) might warm Canadian politicians, who are essential to approving the combination." As such, the Journal -- obviously having picked up on the thinking of some Wall Street types -- suggested that a role reversal, with Alcan making a "Pac-Man" bid for Alcoa, might make sense.
But mid-article, the Journal seemed to shrug off that idea, noting that, while "Canada has a relatively open market for corporate control," and that "many companies have already slipped south of the border without political interference ... Pennsylvania [where Alcoa hangs its hat] is a remarkably unfriendly jurisdiction of unwanted acquirers." So much for the wisdom behind a possible Alcan run at Alcoa.
In the meantime, Alcoa appears to be jumping through hoops to placate Canadian politicos, especially those in Quebec. Last week, the company released a statement citing a letter to Alcan directors noting that "Alcoa [in the letter] outlined the many ways in which its offer to acquire Alcan not only meets, but exceeds [Alcan's] continuity agreements [with the Government of Quebec]."
It's becoming increasingly clear that an ultimate combination of the two North American aluminum giants must clear a number of hurdles. Nevertheless, I'm intrigued by both companies, and particularly by the potential marriage of the two. For instance, both trade at a forward multiple in the vicinity of 12 to 14 times, and each has an attractive PEG ratio of 1.2 to 1.4. Both have solid balance sheets and generate mid-teens returns on equity.
I'd suggest that Fools -- especially those who haven't looked closely at these two aluminum companies in the past -- familiarize themselves with both, and watch their figurative progress toward the altar very, very carefully.
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Fool contributor David Lee Smith does not own shares in the companies mentioned. He welcomes your questions or comments. The Motley Fool has a disclosure policy.
