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 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.
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. 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.
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.
The split is expected to take place in the second half of 2016 and
the legacy aluminum firm will retain the name Alcoa, the company
said. Chief Executive Officer Klaus Kleinfeld will become CEO of the
new, unnamed entity and will remain chairman of Alcoa throughout the
transition period.
The company did not provide a timeline for choosing a CEO for Alcoa
after the split. The division of the company does not need to be
approved by shareholders, sources familiar with the matter said.
The legacy business had revenue of $13.2 billion in the 12 months
ended June 30 and EBITDA of $2.8 billion, with 64 facilities and
around 17,000 workers.
The new firm created by the split had revenue for the same period of
$14.5 billion, with EBITDA of $2.2 billion, 43,000 workers and 157
facilities. Through a series of acquisitions, the company says it is
well positioned to take advantage of growing aerospace and
automotive markets in the years to come.
About 40 percent of the revenue for the new "value-added" business
came from the aerospace sector – a key area targeted for growth -
for that period.
While Alcoa has tried to figure out what to do with its legacy
business, including selling off some of its more traditional and
costly smelting facilities, it has also been investing heavily in
acquisitions to bolster its aerospace and automotive operations.
Recent purchases include aerospace and defense industry-focused
titanium supplier, RTI International Metals Inc, for $1.3 billion
and privately-held TITAL, which makes titanium and aluminum
structural castings for aircraft engines and airframes.
Falling aluminum prices led to Alcoa missing second-quarter earnings
estimates and, year to date, the company's stock is down more than
42 percent. Some analysts have suggested that a split would benefit
the company's aerospace and automotive business and could lead to a
takeover of its traditional aluminum business.
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NEW ALLOY FOR CAR MAKERS
The company has also been working to improve its own in-house
technology. 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.
Micromill-made aluminum goes from molten metal to cooled, coiled
metal in 20 minutes versus the 20 days it takes to roll conventional
aluminum. It is 30 percent stronger than regular aluminum, and far
easier to shape into more intricate forms, including inside panels
for car doors or fenders.
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. Alcoa has
said it is in talks with eight other automakers on using Micromill
technology, but has not disclosed names.
Meanwhile, a 25 percent drop in aluminum prices since last September
has pushed benchmark London Metal Exchange prices to six-year lows.
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.
As a result, more than 10 percent of smelting capacity outside of
China, or 3.5 million tons of production, is running in the red.
Alcoa Inc has closed or curtailed 170,000 tons of annual output this
year as part of a review of 500,000 tons of smelting capacity
announced in March.
(This version of the story was corrected to fix timing of split to
second half of 2016, headline and fifth paragraph)
(Reporting By Nick Carey; Editing by Michele Gershberg and Ed
Davies)
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