In the shadow of a supply glut that’s been nothing less than miserable for the company and its shareholders, Alcoa (AA) will be breaking itself up into two different companies in an effort to unlock — or at least preserve — as much shareholder value as possible.
Current owners of Alcoa stock should see the spun-off shares appear in their brokerage accounts in the latter half of the coming year.
On the surface, the AA split seems like a victory for shareholders, given the 4% jump Alcoa stock made in the immediate wake of the news.
It remains to be seen, however, if the maneuver will ultimately do much to truly benefit those with a position in Alcoa stock.
Alcoa Split in the Works
The news came on Monday morning — Alcoa will be dividing its traditional aluminum (and other material) supply business from its specialty refinement and alloy business that serves the aerospace and automobile industries.
The upstream and downstream businesses aren’t necessarily mismatched; the former in many ways supplies the raw materials used by the latter. But, the two divisions don’t necessarily make one another stronger by staying under the same roof, and it’s increasingly clear that uber-cheap aluminum prices are dragging down what would otherwise be impressive results from the value-add division.
Alcoa isn’t exactly wildly transparent as to each unit’s performance. Still, the company’s accounting statements and other investor materials are at least clear enough to let owners of Alcoa stock know its traditional bauxite, alumina, aluminum, casting and energy units drove $13.2 billion in revenue during the twelve month period ending in June, while it’s titanium and alloy unit entertained $14.5 billion in sales for the same time frame.
CEO Klaus Kleinfeld said of the decision:
“We have repositioned the upstream business; we have an enviable bauxite position and are unrivalled in Alumina, we have optimized Aluminum, flexed our energy assets, and turned our casthouses into a commercial success story. The upstream business is now built to win throughout the cycle. Our multi-material 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 multi-materials profile and brought key technologies to market; all while significantly increasing profitability.”
He’s right on all counts, save one … the part about “significantly increasing profitability.” Though certain segments may have been profitable during the time in question, the company as a whole hasn’t been meaningfully or reliably profitable in years.
Is It or Isn’t It?
To that end, the question those who presently own Alcoa stock have to be asking themselves at this point is, is the sum of the parts truly greater than the whole? After all, the opposite of that scenario is usually the case.
Indeed, it was only within the past year or so Alcoa was wading into deeper aerospace waters via acquisitions for the explicit purpose of — brace yourself — adding value to AA stock.
Alcoa has actually been tiptoeing into the aerospace business for a while now, with the 2011 bid for TransDigms‘s (TDG) aerospace fastener division being the first noteworthy deal of the bunch.
Alcoa arguably didn’t start getting serious about the specialty metals and titanium business until last November, when it acquired Firth Rixson. In the meantime it acquired Tital and RTI International.
Things change; that’s just business. But, this is a dramatic change in less than twelve months’ time. It was only in March of this year, when the company announced the acquisition of RTI, that Klaus Kleinfeld opined:
“We are combining two innovators in materials science and process technology, shifting Alcoa’s transformation into a higher gear. RTI expands our aerospace portfolio market reach and positions us to capture future growth to deliver compelling value for customers, shareholders and employees.”
In other words, in March of this year, Alcoa stock owners were better served with RTI being in the fold, but six months later they’re better served with RTI (and Tital, and Firth Rixson, etc.) out of the fold.
Again, things change. Six months ago, it was unlikely anybody saw the aluminum supply glut coming, and Alcoa did indeed aggregate several disparate titanium and alloy business into one impressive unit — but at what cost to the already-struggling and still-struggling upstream business?
Bottom Line
All things considered, the AA split is probably the right call, if only because it gives investors a choice of which of the two stocks to own (if not both). That alone has been and should be bullish for AA shares.
And yet, all one of those two companies’ shareholders will own, as of next year, is a poor-performing aluminum and smelting company. It won’t take long for the market to figure that out. Maybe just one quarter’s results will do the trick.
In other words, the sum of the parts may not actually be greater than the whole, once all is said and done. Not only has total debt increased by about a billion dollars since Alcoa turned up the heat on its acquisition efforts, but the total amount of outstanding Alcoa stock has grown about 15% since the end of 2013.
That dilution and debt is being divvied up too — never even mind the transaction and legal costs of spinning off a company after incurring those same costs acquiring these companies over the course of the past couple of years.
Moral of the story?
Sometimes it’s best just to make a decision and stick to it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
