Alcoa to split into two companies; power plants to go to one of them

Alcoa (NYSE:AA), which is a major generator of power for its metals operations in the U.S., announced Sept. 28 that its Board of Directors has unanimously approved a plan to separate into two independent, publicly-traded companies.

The separation will launch two industry-leading, Fortune 500 companies.

  • The globally competitive “Upstream Company” will be made up of five strong business units that today make up Global Primary Products – Bauxite, Alumina, Aluminum, Casting and Energy.
  • The innovation and technology-driven “Value-Add Company” will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions.

The transaction is expected to be completed in the second half of 2016. At that point Alcoa shareholders will own all of the outstanding shares of both the Upstream and Value-Add Companies.

Both entities will be capitalized prudently, the company said, with the Value-Add Company targeting an investment grade rating and the Upstream Company a strong non-investment grade rating. After the separation, the Upstream Company, with its strong history in the aluminum and alumina markets, will operate under the Alcoa name. The Value-Add Company will be named prior to closing.

“In the last few years, we have successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions,” said Klaus Kleinfeld, Chairman and Chief Executive Officer. “After steering the Company through the deep downturn of 2008, we immediately went to work reshaping the portfolio. 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.

Upon completion of the transaction, Klaus Kleinfeld will lead the Value-Add Company as Chairman and Chief Executive Officer. He will also serve as Chairman of the Upstream Company for the critical initial phase, ensuring a smooth and effective transition. Each company will have its own independent board of directors that will include members of the current Alcoa Board. Full management teams and boards for both companies will be named in the months leading up to the launch of the two companies in the second half of 2016.

The Upstream Company

After the separation, the Upstream Company will be a cost-competitive industry leader in bauxite mining, alumina refining and aluminum production, positioned for success throughout the market cycle. The company’s footprint will include 64 facilities worldwide, and approximately 17,000 employees.

Global aluminum demand is expected to grow 6.5% in 2015 and double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection. The Upstream Company’s world-class asset base will include the world’s largest bauxite mining portfolio, with 46 million bone dry metric tons of production in 2014. Alcoa has been building its third-party bauxite business and is well-positioned to meet growing global demand.

The company will be the world’s fourth largest aluminum producer with a highly competitive second quartile cost curve portfolio. It will have an unrivalled value-add casthouse network in close proximity to customers, and a substantial portfolio of energy assets with power production capacity of approximately 1,550 MW with operational flexibility to profit from market cyclicality. Alcoa said it has secured approximately 75% of smelter power needs through 2022. The power generating assets are in North and South America, and in Australia. That includes coal-fired plants in Texas and Indiana.

The Alcoa presentation about the company split noted that the company has a proven ability to divest high-value assets to secure capital, e.g., the Tapoco Hydroelectric Project was sold for about $600 million in 2012.

The Value-Add Company

After the separation, the Value-Add Company will be a premier provider of high-performance multi-material products and solutions with 157 globally diverse operating locations and approximately 43,000 employees. The overall contribution of the value-add portfolio to Alcoa’s after-tax operating income has more than doubled from 25% in 2008 to 51% in 2014.

The Value-Add Company will be positioned for profitable growth by increasing share in fast growing end markets and leveraging significant customer synergies across the midstream and downstream portfolios. The company will be a differentiated supplier to the high-growth aerospace industry with leading positions on every major aircraft and jet engine platform, underpinned by market leadership in jet engine and industrial gas turbine airfoils, and aerospace fasteners.

The company will be at the forefront of capturing demand for aluminum intensive vehicles through Alcoa’s recent rolling mill capacity expansions and the commercialization of breakthrough technologies such as the Micromill. Future profitable growth will be supported by a full pipeline of innovative products and solutions, and the pursuit of investment opportunities that provide a return above the cost of capital.

Separate companies mean separate strategies

The separation will enable both the Value-Add Company and Upstream Company to pursue their own independent strategies, pushing the performance envelope within distinct operating environments, Alcoa said.

Alcoa is currently targeting to complete the separation in the second half of 2016. The transaction is subject to certain conditions, including, among others, obtaining final approval by Alcoa’s Board of Directors, receipt of a favorable opinion of legal counsel with respect to the tax-free nature of the transaction for U.S. federal income tax purposes, and effectiveness of a Form 10 registration statement to be filed with the U.S. Securities and Exchange Commission. Alcoa may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.

Alcoa will hold its third quarter conference call as scheduled on Oct. 8, 2015 at 5:00 PM Eastern Daylight Time to present quarterly results.

A global leader in lightweight metals technology, engineering and manufacturing, Alcoa pioneered the aluminum industry over 125 years ago. Today, its approximately 60,000 people in 30 countries deliver value-add products made of titanium, nickel and aluminum, and produce best-in-class bauxite, alumina and primary aluminum products.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.