UPDATE 1-Alcoa to split into two companies by second half of 2016

28 Sep 2015 | Author: | No comments yet »

Alcoa splitting its metals segment from its better performing automotive and aerospace units.

NEW YORK, N.Y. – Alcoa will split into two independent companies, one focused on aluminum production and the other on engineered products for the automotive and aerospace industries.

The nearly 127-year-old company announced that it would separate its legacy commodity side, which is to inherit the Alcoa name, from its newer, bigger-ticket businesses, which serve markets such as aerospace and automotive. The company’s announcement didn’t specify locations for those upstream operations and their 17,000 employees, but Alcoa currently has significant production capacity in the province of Quebec. New York-based Alcoa’s traditional smelting business has been hurt by a ballooning surplus of aluminum, which has caused prices to sink and deepened the industry’s worst crisis in years. Over the last seven years, under Klaus Kleinfeld, the chief executive, Alcoa has built its newer, higher-margin businesses through almost $5 billion worth of acquisitions and several divestitures. At the same time, the company has bet on growth from higher-margin titanium and high-strength aluminum sales to the aerospace industry, citing a growing order book for airplane production and renewed global spending on automobiles.

About 40 per cent of its revenues have come from the aerospace market. “In the last few years, we have successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions,” Kleinfeld said in a statement. “With the unanimous support of Alcoa’s Board we now take the next step; launching two leading-edge companies, each with distinct and compelling opportunities, and each ready to seize the future.” The other company, which Alcoa is calling its value-add company, will include its global rolled products, engineered products and solutions, and transportation-and-construction solutions businesses.

Airplane manufacturers have turned to lightweight titanium from aluminum and automakers to new, strong aluminum alloys instead of high-strength steel to improve performance and fuel efficiency. 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.

Efforts by the world’s third-largest producer of aluminum to address these diverging trends resulted in conflicting messages for investors, according to sources close to the company. This company will also be responsible for manufacturing aluminum alloys for commercial trucks, underpinned by its position as the supplier of the material to Ford’s best-selling line of F-150 light-weight trucks. The move comes as Alcoa has struggled with the price for raw aluminium remaining under pressure as China floods the global markets with steel, aluminium and other industrial metals. The segment that is to become the newer unit, which has yet to be named, provides metal products for transportation, industrial gas turbines and construction industries. Chief Executive Officer Klaus Kleinfeld will become CEO of the new, unnamed entity and will remain chairman of Alcoa throughout the transition period.

These moves could be seen as a response to the current market for aluminum that has seen prices drop to under $1,700 a ton, down more than 10% since the start of the year due to an over-supply of industrial metals from China. 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. Companies from industrial conglomerate Danaher Corp. to technology giant Hewlett-Packard Co. have announced plans to break up their businesses recently. The new firm created by the split had revenue for the same period of US$14.5 billion, with EBITDA of US$2.2 billion, 43,000 workers and 157 facilities. Alcoa’s decision to separate is part of a long-term strategy, rather than an effort to appease an activist investor agitating to unlock value, people briefed on the matter said.

Recent purchases include aerospace and defense industry-focused titanium supplier, RTI International Metals Inc, for US$1.3 billion and privately-held TITAL, which makes titanium and aluminum structural castings for aircraft engines and airframes. Last December, Alcoa unveiled a process it calls Micromill to produce high-strength aluminum alloy, targeting automakers who are seeking an alternative to heavier steel. In mid-September Alcoa announced a deal with Ford Motor Co to provide multiple components for the 2016 model F-150 pickup, the best-selling U.S. vehicle since 1982, using Micromill. An unprecedented plunge this year in premiums –surcharges paid for physical delivery – to their lowest in 3-1/2 years have posed the biggest threat to producers’ margins since the 2008 financial crisis.

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