Advertisement

SKIP ADVERTISEMENT

Alcoa to Split Into 2 Companies

Workers assembling a Ford F-150 pickup truck made with Alcoa aluminum. Alcoa plans to split itself into two companies.Credit...Charlie Riedel/Associated Press

Alcoa, which produces both aluminum and parts that go into Ford pickup trucks, said on Monday that it planned to divide those two businesses.

The 127-year-old company’s commodity side will inherit Alcoa’s name. That business helped bankroll the growth of the bigger-ticket metal products business that serves markets like aerospace and automotive.

But a sharp decline in the price of aluminum, driven by weaker demand from China, has altered this relationship, yielding what many investors saw as the best possible outcome: a breakup.

Shares of Alcoa, which had fallen 40 percent this year before Monday, surged even as the broader stock market slumped. Alcoa stock ended the day up 5.9 percent.

For Klaus Kleinfeld, the chief executive of Alcoa, the split culminates a seven-year strategy. Through almost $5 billion worth of acquisitions and several divestitures, Mr. Kleinfeld built a new, yet-to-be-named business, providing metal products for transportation, industrial gas turbines and construction.

The company is betting this side will see a boost: Its products will be increasingly used in the aerospace and auto industries, as its lighter metals could be more fuel-efficient. In September, Alcoa announced its supplies would enable Ford to replace some steel parts in the F-150 pickup truck with a new type of aluminum.

On the commodities side, Mr. Kleinfeld made moves to protect against the cyclical nature of aluminum prices, which can rise and fall on the basis of events such as a Chinese construction boom and bust. He closed high-cost plants and altered the way Alcoa’s products were priced to improve profitability.

“We’ve been building these two value engines — shaping, molding, adding, brushing up and putting them in good form,” Mr. Kleinfeld said in an interview. “Both are fit and have enough strength and scale to stand on their own.”

A benefit for investors is that the separate companies will be more focused and could attract higher valuations. Given the decline in aluminum prices, the new commodities-focused Alcoa could attract value investors, according to Andrew Lane, an analyst with Morningstar.

Video
Video player loading
Klaus Kleinfeld, Alcoa’s chief executive, discussed on CNBC the different advancements in recent years that led to the decision to split the company into two publicly traded companies.

The new metal products business could interest mutual funds, which historically resisted investing in Alcoa out of concern about the exposure to the commodity swings, he said.

David Gagliano, an analyst with BMO, does not think the Alcoa split will ultimately provide much of a boost to investors.

“We don’t think there’s a lot of incremental value coming out of this one,” he said. “At current commodity prices, the sum of the two pieces is exactly where the stock is trading.”

“I think the reason is because the upstream business is worth so much less than it used to be,” he said, referring to the aluminum business.

While other recent American breakups have involved investors that take large stakes and agitate for a split, Alcoa’s decision was not in response to so-called activists, people briefed on the matter said.

Last year, eBay agreed to spin off PayPal, the payment processor, after the hedge-fund billionaire Carl C. Icahn pushed for the move. Relational Investors achieved a similar result in 2013 with Timken, which split into two companies: one focused on steel and the other on bearings.

Warren E. Buffett brought attention to the aluminum industry in his biggest acquisition yet. In August, Buffett’s Berkshire Hathaway agreed to buy Precision Castparts for $32.7 billion, including debt. Alcoa’s new business will include products for transportation and packaging, vehicle wheels, building and construction, and pieces that go in jet engines and gas turbines. The commodities business will consist of bauxite mining, alumina refining, and smelting and casting primary metals. Alcoa also owns energy assets across North and South America and Australia.

In the 12 months through June, Alcoa’s newer businesses generated $14.5 billion in revenue and $2.2 billion in earnings before interest, taxes, depreciation and amortization. The commodity-focused segment posted $13.2 billion in revenue and $2.8 billion in such earnings over the same period.

The transaction, which will be tax-free to Alcoa shareholders, is expected to close during the second half of 2016.

Mr. Kleinfeld will become the chief executive and chairman of the new company, and will serve as temporary chairman of Alcoa with a new management team, to be named in the months leading up to the introduction of the two companies in 2016. Alcoa shareholders will hold stock in both companies after the split.

Morgan Stanley and Greenhill are the financial advisers to Alcoa on the transaction. Wachtell, Lipton, Rosen & Katz is providing legal advice.

A version of this article appears in print on  , Section B, Page 7 of the New York edition with the headline: Alcoa Split Will Separate Products and Commodity. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT