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TORONTO (miningweekly.com) – US-based speciality alloys manufacturer Alcoa will split into two Fortune 500 companies, separating its legacy upstream business segment from its downstream value-adding business segment, which it has been aggressively building out over the past several years.
Alcoa explained on Monday that the upstream company would comprise five business units that currently made up global primary products – bauxite, alumina, aluminium, casting and energy. The innovation and technology-driven value-add company would include global rolled products, engineered products and solutions, and transportation and construction solutions.
“Inventing and reinventing has defined our company throughout its 126-year history. 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,” chairperson and CEO Klaus Kleinfeld stated.
The Monday announcement sent Alcoa’s NYSE-listed stock soaring nearly 9% before noon to touch $9.87 apiece, after shedding nearly 30% since the start of the year. A market glut amid slower-than-expected demand had dimmed aluminium spot prices over the last 12 months to trading near five-year lows.
Alcoa had repositioned the upstream business over the last several years to have a significant bauxite position and unrivalled alumina resources, while the aluminium business had been optimised. Kleinfeld noted that the company had flexed its energy assets and turned its cast houses into a commercial success story.
“The upstream business is now built to win throughout the cycle. Our multimaterial, value-add business is a leader in attractive growth markets. We have intensified innovation, made successful acquisitions, shed businesses without product differentiation, invested in smart organic growth, expanded our multimaterials profile and brought key technologies to market, all while significantly increasing profitability,” Kleinfeld boasted.
FOCUS ON ADDING VALUE
After closing the transaction, Kleinfeld would lead the value-add company as chairperson and CEO. He would also serve as chairperson of the upstream company for the critical initial phase, ensuring a smooth and effective transition. Each company would have its own independent board of directors that would include members of the current Alcoa board. Full management teams and boards for both companies would be named in the months leading up to the launch of the two companies in the second half of 2016, when the transaction was expected to close.
At this point, Alcoa shareholders would own all of the outstanding shares of both companies. The separation was intended to qualify as a tax-free transaction to Alcoa shareholders for US federal income tax purposes.
Both independent companies were expected to attract an investor base best suited to their unique value proposition and operational and financial characteristics. Both entities would be capitalised “prudently”, with the value-add company targeting an investment-grade rating and the upstream company a strong noninvestment-grade rating, Alcoa advised.
After the separation, the upstream company, with its strong history in the aluminium and alumina markets, would operate under the Alcoa name. The value-add company would be named before the transaction closed.
The upstream company’s footprint would include 64 facilities worldwide and about 17 000 employees. Revenue for the 12 months to June 30 was $13.2-billion, with $2.8-billion in earnings before interest, taxes, depreciation and amortisation (Ebitda).
The upstream company was expected to benefit from global aluminium demand that was expected to grow 6.5% in 2015 and double between 2010 and 2020; so far this decade, global demand growth was tracking ahead of this projection, Alcoa noted.
After the separation, the value-add company would be a provider of high-performance multimaterial products and solutions with 157 globally diverse operating locations and about 43 000 employees. Pro-forma revenue for the value-add company for the 12 months through June 30 was $14.5-billion, with $2.2-billion in pro-forma Ebitda.
The overall contribution of the value-add portfolio to Alcoa’s after-tax operating income had more than doubled from 25% in 2008 to 51% in 2014. Automotive revenues were also expected to increase 2.4 times from 2014 to $1.8-billion in 2018.
Alcoa had been investing heavily in improving its capabilities. In December, the company revealed the Micromill process for the production of high-strength aluminium alloys, targeted at automakers seeking a lighter, more durable alternative to steel. Earlier this month, Alcoa announced a deal with Ford Motor Company to provide components made using the Micromill technology for the 2016 model F-150 pickup, the best-selling US vehicle since 1982.
The value-add company would be positioned for profitable growth by increasing its market share in fast-growing end markets and leveraging significant customer synergies across the midstream and downstream portfolios. The company expected to be a differentiated supplier to the high-growth aerospace industry with prominent positions on every significant aircraft and jet engine platform, underpinned by market leadership in jet engine and industrial gas turbine aerofoils and aerospace fasteners.
Morgan Stanley and Greenhill & Co were serving as financial advisers to Alcoa, and Wachtell, Lipton, Rosen & Katz were serving as legal counsel in connection with the separation.
Investment risk adviser Moody's Investors Service on Monday changed Alcoa's outlook to 'developing' from 'positive'. The developing outlook captured the uncertainty as to the final capital structure of each of the separate companies, the organisational and management structures and division of other liabilities or legal proceedings that might exist. Ultimate rating outcomes would depend on improved clarity and earnings and cash flow generation expectations in future, Moody's advised.
Simultaneously, Moody's affirmed the Ba1 corporate family rating, Ba1-PD probability of default rating, Ba1 senior unsecured rating, Ba1 medium-term note programme rating, Ba1 senior unsecured shelf rating, Ba2 preferred stock rating and SGL-1 speculative-grade liquidity rating.