From The Wall Street Journal
Alcoa Inc. said Monday it would split in two, a move that would isolate the company’s more profitable parts-making units from its raw aluminum operations.
The split is one of the most dramatic corporate consequences of the commodities bust driven by a slowdown in Chinese economic growth. As it consumes less, China has found itself with a glut of metals, especially aluminum and steel, which it has been shipping abroad, causing trade frictions and depressing markets.
Alcoa’s move also comes as other large companies undertake breakups in the expectation that a narrower focus will drive better results.
The raw metals business, battered by falling aluminum prices, will include the company’s bauxite-mining, alumina-refining and aluminum-production businesses and will still be called Alcoa to reflect the company’s 126-year-old heritage as the world’s first industrial producer of aluminum. The other entity, which for now Alcoa is calling its “value-add company,” will comprise its global rolled products, engineered products and solutions, and transportation-and-construction businesses.
The Alcoa entities “now each have the strength and scale to each stand on their own,” Alcoa Chief Executive Klaus Kleinfeld said in an interview.
Alcoa said 40% of the value-add unit’s revenue will come from the aerospace industry, through its strength in areas such as jet engine and industrial gas turbine airfoils and aerospace fasteners. The new company is also expected to benefit from a jump in automotive revenue amid growing demand for aluminum-intensive vehicles.
Under Mr. Kleinfeld, formerly chief executive at Siemens AG, Alcoa has closed unprofitable raw aluminum smelters while expanding its manufactured parts business, including through deals. Last year, it acquired U.K. jet-engine parts maker Firth Rixson Ltd., and this year it bought Pittsburgh-based RTI International Metals Inc., one of the world’s biggest makers of fabricated titanium products for the aerospace industry.
The decision to split follows years of grumbling by large institutional shareholders dissatisfied with Alcoa’s tumbling share price. Alcoa has lost over 40% of its market value in the past year as aluminum prices have crumbled. The stock was up 1.8% at $9.23 Monday afternoon in New York.
Mr. Kleinfeld will become CEO and chairman of the value-add company, which would have had $14.5 billion in revenue in the year ended June 30.
“You have to look at where you can create more value,” he said of his choice of companies to run. He will also act as temporary chairman of the raw aluminum business.
Prices for raw aluminum, Mr. Kleinfeld said, didn’t drive the decision to split. “You can’t pin this to the aluminum price,” he said. The bauxite-mining and alumina-refining “are in really good shape.”
Alcoa’s raw business would have had revenue of $13.2 billion in the year ended June 30. Alcoa has closed or curtailed 33% of its total smelting capacity since 2007 to cope with weak prices.
Raw aluminum prices are down more than 40% since 2011, to around $1,500 a ton. A split allows Alcoa to “prevent the market from assigning a negative value to the ingot business,” said John Tumazos of Very Independent Research LLC. And with Alcoa due to report earnings on Oct. 8, “the timing is convenient,” he added.
With growth in the businesses making wheels, fasteners and other products, often including metals other than aluminum, pressure has increased on Alcoa to change its corporate structure. The announcement Monday was a “long time coming,” said Bill Selesky of Argus Research. The biggest challenge will be raw aluminum “with China producing aluminum at a break-neck pace with little regards for costs,” Mr. Selesky said.
Alcoa’s split, while offering new opportunities, also presents a new set of challenges. Mr. Kleinfeld must still decide to what extent the two companies will cooperate. Alcoa’s smelters sell a large proportion of their output to business units that shape them into parts. Alcoa said Monday that these units will pass along changes in raw prices to customers. However, if raw prices continue to suffer, Alcoa will still feel the impact.
“That’ll still be their biggest problem,” says Mr. Selesky, the Argus analyst. “If prices continue to suffer, they’ll just have to keep closing smelters.”
The aerospace and automotive divisions have been driving profit for Alcoa recently amid the global aluminum glut. Alcoa has benefited from Ford Motor Co. and other auto makers buying aluminum to make their cars lighter to comply with new fuel-efficiency standards.
In the second quarter, Alcoa said automotive sheet revenue almost tripled with its plant in Davenport, Iowa shipping a “record volume.”
Alcoa’s spinoff will compete with Portland-based Precision Castparts Corp., which Warren Buffett’s Berkshire Hathaway Inc. bought in August for $37.2 billion, including debt, the investor’s biggest acquisition yet.
The deal is expected to close in the second half of next year. Alcoa shareholders will own all outstanding shares of both companies. Alcoa said it expects the deal to qualify as a tax-free transaction for shareholders.