Alcoa announced Monday that it will split into two independent companies by separating its aluminum and automotive metals businesses.
The Alcoa headquarters building on the North Shore of the Allegheny River.
By Len Boselovic / Pittsburgh Post-Gazette
Alcoa’s plan to split into two businesses — one old line and slow growth; the other, high-tech and promising — takes a page from a well-worn playbook that companies consult whenever problems with one of their businesses keep a lid on their stock price.
One of the two new publicly traded companies will be the descendant of the $20,000 smelter that industrialist Alfred Hunt opened in 1888 at the corner of 32nd and Smallman streets. It will keep the Alcoa name and will include the bauxite, alumina, aluminum, casting and energy businesses. Those enterprises generated revenue of $13.2 billion over the 12-month period ended June 30 and employ about 17,000 people.
The other business, yet to be named, will include Alcoa’s downstream units that convert aluminum and titanium into higher-profit products for the aerospace, automotive and other industries. Those units produced revenue of $14.5 billion over the same period and employ 43,000.
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Although the commodity businesses helped Alcoa when aluminum prices were strong, global overcapacity and exports from China have driven prices lower.
JPMorgan Chase recently lowered its earnings outlook for Alcoa, saying it expects aluminum prices “to remain at depressed levels through 2016.” Alcoa has closed, sold or curtailed a third of its aluminum smelting capacity since 2007 in a drive to make the upstream business more competitive.
The announcement Monday was no surprise to analysts who have heard chairman and CEO Klaus Kleinfeld extol the potential of the downstream businesses. His praise has been backed up by significant investments, including the $2.85 billion acquisition of Firth Rixson, a United Kingdom jet engine component producer, and the $1.5 billion purchase of RTI International Metals, a Moon-based titanium producer that enhances Alcoa’s ability to serve the aerospace industry.
“Kleinfeld’s commentary always skews heavily toward the possibilities encompassed by the company’s value-add exposure, while excitement about upstream operations is absent. It comes as no surprise that he will serve as CEO of the value-add company,” Moringstar analyst Andrew Lane wrote in a note to clients.
Shares of Alcoa, one of the region’s worst performing stocks over the past decade, rose 52 cents Monday to close at $9.59. They are down 39 percent this year.
Other companies that have relied on the same strategy include U.S. Steel, whose shareholders voted in 2001 to split the combined steel and energy business into U.S. Steel and Marathon Oil. The thought then was that investors would put a higher price tag on the energy business if it was freed from the cyclical steel business.
More recently, Hewlett-Packard announced in October it would separate its sluggish personal computer and printer business from its server, storage, networking and related businesses.
“Many companies are trying to split up to be more focused and closer to their customers,” said Fariborz Ghadar, director of Penn State’s Center for Global Business Studies.
Mr. Ghadar said Alcoa’s downstream businesses have to listen to customers a lot more closely than its commodity businesses do.
“You need a different kind of mentality, a different kind of management, and a different kind of culture,” he said. “The culture of the old line Alcoa doesn’t fit nicely with a high-tech environment.”
John Tumazos, an independent metals analyst based in Holmdel, N.J., said aluminum prices are about 44 cents a pound lower than they were a year ago. He blames China, which he believes wants to control 60 or 70 percent of the world’s steel and aluminum production. The devaluation of that country’s currency last month was part of its strategy for reaching that objective, he said.
Mr. Tumazos called Alcoa’s announcement “a negative outlook statement concerning aluminum.”
“The Alcoa guys are basically saying they don’t want the ingot business to kill them, or drag them down,” he said.
The company expects the breakup to occur in the second half of next year. It provided few details of how the split will be accomplished, including what formula will be used to convert current Alcoa shares into shares of the two new companies. Alcoa said it expects the downstream business to have an investment grade bond rating while the commodity business will have a non-investment grade rating.
Other unanswered questions include how its approximately 2,000 employees in the Pittsburgh region will be affected and the fate of Alcoa’s Technical Center in Upper Burrell. Mr. Tumazos said much of the work coming out of the research center has been focused on Alcoa’s downstream businesses, whose post-split chairman and CEO will be Mr. Kleinfeld.
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