Why the Wise Metals acquisition is a smart move for Constellium

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More on Constellium’s acquisition of Wise Metals

Previously in this series, we covered Constellium N.V.’s (CSTM) recent acquisition Wise Metals Group for $1.4 billion—consisting of $455 million in cash and $955 million in debt assumption. In this article, we’ll look more closely at why this deal makes strategic sense for Constellium.

 

revenue break up

Wise Metals to increase Constellium’s footprint in U.S.

This chart shows a geographical breakdown of Constellium’s 2013 revenues. As you can see, the company derives almost three-quarters of its revenues from Europe. The U.S. accounts for only about 13% of Constellium’s revenues.

Europe is still reeling from the impact of its sovereign-debt crisis. Economic indicators have been mixed, at best, affecting all metal companies operating in Europe. With the acquisition of Wise Metals, Constellium expects its revenue share from the U.S. to increase.

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The U.S. markets have been resilient. Analysts expect the demand for both steel and aluminum in the U.S. to grow by more than the global average. The SPDR S&P Metal and Mining ETF (XME) can give you diversified investment exposure to both of these sectors. For more information, consult Market Realist’s Steel and Aluminum industry pages.

Constellium gets instant access to existing business

With the acquisition of the Wise Metals operation, Constellium gets quick access to U.S. markets. And, according to Constellium management’s estimates, it would cost close to $2 billion to build a plant of similar capacity. Not only would such an undertaking cost more, it would be a time-consuming process.

An added advantage of buying Wise Metals is access to the acquired company’s wide customer base. Constellium management says most of Wise Metals’ sales are already contracted. And as we know, contracted sales mean stable revenues. Other aluminum companies, such as Alcoa Inc (AA), Kaiser Aluminum Corp. (KALU), and Century Aluminum Co (CENX), also focus on securing long-term contracts with customers.

Another important thing to consider in an acquisition like this is its financial impact. We’ll discuss this in detail, next.

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