NEW YORK -- Alcoa Inc. said today it will split into two companies to separate its struggling aluminum smelting operations from production of lightweight metals for its faster-growing aerospace and automotive business.
Falling commodity prices and a glut of aluminum have battered Alcoa's stock, which before the news, had fallen more than 42 percent this year.
The split will separate the cyclical, upstream commodity business that excels during demand upswings from a high-technology, downstream business that is benefiting from rising demand for new alloys and titanium for planes and automobiles.
The split is expected to be completed in the second half of 2016. The traditional aluminum business will retain the Alcoa name, while the newer company, which Alcoa said would have higher value products, is still unnamed.
"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," CEO Klaus Kleinfeld told Reuters.
On completion of the split, Kleinfeld will continue to lead the new downstream company and will also serve as chairman of the upstream company “for the critical initial phase, ensuring a smooth and effective transition.”
The tax-free transaction is expected to be completed in the second half of 2016, giving Alcoa shareholders all shares of both the upstream and value-add companies, it said.
The new, upstream Alcoa will employ about 17,000 people. It had revenue of $13.2 billion in the year ended June 30 and earnings before interest, taxes, deprecation and amortization of $2.8 billion. It will hold a “strong non-investment grade” credit rating, New York-based Alcoa said.
The downstream company will have about 43,000 workers, with sales of $14.5 billion and Ebitda of about $2.2 billion in the year through June 30. Alcoa, which said it will target an investment-grade rating, has been striving to boost sales in the automotive industry.
In December, it unveiled a process to produce high-strength alloy as an alternative to steel. Automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018, it said in the statement. It’s also looking to the aerospace industry for growth.
Josh Sullivan, an analyst with Sterne Agee CRT, said Alcoa had already been in the process of a transition, including its recent acquisition of RTI International Metals.
"The commodity business was a significant drag, not only on valuation but on the resources of the company," Sullivan said.
In a conference call with analysts, Alcoa said that as of Dec. 31 2014, its pension was underfunded by about $3.3 billion.