Alcoa Inc said on Monday it would split the company into two, separating a faster-growing plane and car parts business from traditional aluminum smelting operations as shareholders seek higher returns amid a commodity slump.
Pressured by a 42 percent drop in its share price this year and a surge in Chinese aluminum exports, Alcoa is joining a wave of major corporations that recently have sought to break up to add shareholder value, such as General Electric Co and Hewlett-Packard Co.
Shares of the 127-year-old company rose 2.4 percent to US$9.29 as analysts applauded its intensified focus on products for expanding businesses like aerospace and auto.
A global glut of aluminum, which has depressed prices, has battered Alcoa stock, driving the company’s market value this year down to about US$12 billion.
A 25 percent drop since September last year has pushed aluminum prices to six-year lows. An unprecedented plunge this year in premiums — surcharges paid for physical delivery — to their lowest in three-and-a-half 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 China, or 3.5 million tonnes of production, is running in the red. Alcoa has closed or curtailed 170,000 tonnes of annual output this year, part of a review of 500,000 tonnes of smelting capacity announced in March.
“Alcoa has faced this problem for decades: No matter what they have done to enhance their product line, their stock has traded based on metal prices,” Bradford Research analyst Charles Bradford said.
Alcoa’s traditional business, which also includes better-performing bauxite and alumina, will retain the Alcoa name. The newer company is still unnamed.
The split is expected to be completed in the second half of next year.
“We are interested in creating value for our customers, for our shareholders, for our employees, and at this point this is the option we see that creates the biggest value,” chief executive Klaus Kleinfeld said.
Kleinfeld will become CEO of the new company and remain Alcoa chairman during a transition period.
“We believe both entities have gotten into a shape that they are competitive and sizeable and they can stand on their own,” he said.
Alcoa had already been in the process of a transition, including acquisitions to beef up its business for such sectors such as aerospace and autos, Sterne Agee CRT analyst Josh Sullivan said.
“The commodity business was a significant drag, not only on valuation, but on the resources of the company,” Sullivan said.
Alcoa did not provide details on the cost of carrying out the split, which it said should be tax free for shareholders. It is targeting an investment grade credit rating for its “value-added” business and “strong non-investment grade” rating for its legacy business.
The company did not provide a timeline for choosing a chief executive for Alcoa after the split. The division of the company does not need shareholder approval, sources familiar with the matter said.
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