Alcan deal sends fund managers on the hunt for a new large-cap

Hot on the heels of BCE takeover news comes an announcement of another huge merger that’s sure to affect Canadian investors. Anglo-Australian mining juggernaut Rio Tinto has made a $38.1 billion all-cash offer to buy Alcan, Canada’s largest mining company.

The deal has fund companies searching for new places to invest the eventual cash windfall, but it might not be easy — when BCE and Alcan close their deals, four of the S&P/TSX 60 companies will have dropped off the list, following last year’s takeovers of Falconbridge and Inco. “If you like large-cap companies, you’ve got two less to choose from,” says Adrian Mastracci, portfolio manager at KCM Wealth Management.

He thinks mid-cap companies are in a position to step up and fill the void that the bigger players are leaving. “We might see some more M&A here,” he says. “There’s lots of that talk going on in boardrooms, and I think we’ll see companies act.”

For now, investors and fund managers will need to reevaluate their holdings. With nearly every major Canadian equity fund having a stake in Alcan, finding a new place to park the big dollars could be a challenge.

“There’s going to be a lot of money looking for a home,” says Mastracci.

Luckily, many fund managers are already sussing out the situation. But what if one or two listings attract most of the cash? “There might be a little chase after these companies, but over time it evens out,” Mastracci explains.

It’s still too early to tell where those investment dollars might wind up, but one option is in Rio Tinto itself, which reportedly said that it would list on the TSX after the deal goes through. “That would give Canadians one more choice that you can buy right at home,” says Mastracci.

But, he adds, buying Rio Tinto stock doesn’t mean you’re reinvesting in Alcan. A new stock purchase, even if it involves a former holding, needs careful evaluation. “You’d have to look at it and say how well priced is it? Does it fit into my set of circumstances? Rio Tinto is going to be a fairly levered company and you have to be careful. You don’t want to have a portfolio with a lot of highly levered companies.”

It will be a while still before fund managers need to make any moves, but some investors might not want to wait until the last minute to sell and reinvest. Mastracci says portfolio managers who move quickly will have more time to determine where to redeploy their cash.

Whatever route people choose, no one can say they were surprised by the day’s events — though they might be worried. The recent increase in M&A activity among Canada’s largest companies has reignited the debate over the “hollowing out” of corporate Canada. The Minister of Finance even convened a panel on Thursday to discuss competition and investment policies related to this country’s M&A activity.

Mastracci admits that the list of the top Canadian companies is getting shorter but says there’s no reason to panic or bring new anti-merger legislation into the market. “Bringing the government in with another set of rules is not what the marketplace needs,” he says. “It’s nice to have Canadian content and shareholders, but there’s only so much money in Canada.”

He adds that while Canada’s large-cap market is not as robust as in other countries, it is still a respectable size, so it should not be too much trouble finding a new fund to invest in. “I’d like to see a few more choices, but people who want to replace their dividend should have a reasonable choice.”

Until the time comes to make a move, though, Mastracci will be waiting patiently to see what happens next. And he won’t be shocked if another giant Canadian corporation gets bought by foreigners. “Portfolio managers have been doing this for a long time,” he says. “We just take this in stride.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com