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Alcoa outlines business separation plans

Alcoa outlines business separation plans

Photo by Bloomberg

29th June 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – US aluminium and lightweight alloys specialist Alcoa on Wednesday filed its initial plan to separate its upstream and downstream business segments with US securities regulators, saying the separation will allow each new company to pursue its own distinct corporate strategy and unlock the full value of each business.

Chairperson and CEO Klaus Kleinfeld hailed the filing of the Form 10 as an “important milestone”, as the company prepared to launch two businesses that were “well positioned for success”.

Alcoa's demerger plan would separate the company's aeroplane and aviation parts business under the name Arconic, while the traditional aluminium smelting operations would retain the Alcoa name.

Alcoa advised that its upstream business would retain the name Alcoa Corporation and manage the low-cost base that would enable resilience and value-creation at all stages of the commodity cycle.

Arconic would be the downstream technology-driven company producing performance materials and highly engineered products for growth markets, positioned to deliver consistent profitable growth.

“Through our multiyear transformation, we have substantially repositioned each business and laid the foundation for future long-term success,” said Kleinfeld during a conference call on Wednesday morning.

BUSINESS TRANSFORMATION
In response to the commodity downturn, Alcoa had been optimising its refining and smelting capacity and focused on acquiring advanced aerospace and automotive processes and contracts. The company had announced contracts to provide high-strength aluminium alloys for Ford Motor Company's F-150 pickup and aerospace contracts including titanium seat track assemblies for Boeing's 737 MAX, 777X and 787 Dreamliner.

Alcoa’s regulatory filing showed its upstream business segment’s pro forma revenue in 2015 was $11.2-billion, and its value-added business had revenue of $12.5-billion.

Kleinfeld explained that the new Alcoa would be listed on the NYSE through a tax-free spinoff to shareholders. It would also raise about $1-billion in new debt and provide for up to $1.5-billion in funding through a revolving credit facility. The new upstream business would retain about $236-million of long-term debt following the spinout. Arconic would use cash received from Alcoa Corporation to pay down a portion of the debt retained from Alcoa Inc.

The lion’s share of Alcoa Inc’s debt would remain with Arconic, the larger of the two companies following the split. Alcoa had reported about $9-billion in total debt on its books at the end of the first quarter.

Kleinfeld said the estimated pro forma pension obligation of the new Alcoa Corporation would total about $2.6-billion, while that of Arconic would be about $3-billion, as at March 31.

ASSET SPLIT
Alcoa stated that, in light of volatile commodity and debt markets, Arconic was to retain up to 19.9% of the new Alcoa Corporation to provide Arconic with a liquid security that could be sold later to strengthen the balance sheet if required.

“We continue to monitor market conditions in the commodity and high-yield debt market and to assess the impact of that situation on how to structure the transaction,” Kleinfeld said.

Alcoa had last month turned to a Delaware court to prevent its joint venture (JV) partner in Alcoa Worldwide Alumina and Chemicals (AWAC), Australian company Alumina, from blocking the demerger plan. Alumina on Monday filed a counterclaim seeking court declarations to prevent Alcoa from taking further steps in its separation plan announced in September, including the 60% stake in AWAC, without complying with certain obligations under the AWAC agreements.

The counterclaim also sought to stop the US group from receiving offers to acquire its interest in the various AWAC companies, citing Alumina’s "first option rights".

“Alcoa’s separation plan confirms our contention, which is before the Chancery Court in Delaware, that Alcoa intends to exit the AWAC JV and transfer its interests in AWAC to a new legal entity that will not be controlled by the existing participants in the AWAC arrangement. In our view this is in clear breach of the AWAC JV agreements," Alumina CEO Peter Wasow said in an emailed statement to Mining Weekly Online.

“Alumina remains of the view that, to do so, triggers offer rights in its favour and requires Alumina’s consent," he affirmed.

Alcoa said the business separation was on track for completion during the second half of 2016.

Alcoa’s NYSE-listed stock on Wednesday fell as much as 3.4% to $9.05 apiece.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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