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Raising equity looks tough under Constellium’s current market scenario

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Nov. 27 2019, Updated 9:39 p.m. ET

Acquisition of Wise Metals

As discussed previously, Constellium (CSTM) has announced the acquisition of Wise Metals. Initially, Constellium announced that the deal will be funded through a mix of debt and equity. The company has also taken a bridge loan from Deutsche Bank for this transaction.

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Initial funding mix for Wise Metals

Constellium intends to use a mix of debt and equity to fund the Wise Metals acquisition. However, as highlighted during the 3Q14 earnings conference call, raising equity looks tough with Constellium’s share price hitting a 52-week low. This means that Constellium might have to issue more debt to fund this transaction.

Recently, Alcoa (AA) raised funds for the acquisition of Firth Rixson. Firth Rixson is a leading supplier to the aerospace industry. This acquisition marks another step in Alcoa’s transformation. Century Aluminum (CENX) might also be looking at acquisitions in order to enter the value added business. Currently, both of these companies are part of the Standard and Poors depositary receipt (or SPDR) S&P Metals and Mining exchange-traded fund (or ETF) (XME). Reliance Steel & Aluminum (RS) is another top holding of XME.

Credit ratings might come down

If Constellium (CSTM) raises more debt to fund this transaction, its leverage ratios will worsen. In addition, its profit margins are among the lowest among aluminum plays. Constellium’s credit ratings might come down as it raises more debt. This can be a negative for investors.

Wise Metals was expected to be a game changer for Constellium, as the acquisition will allow Constellium to become a global company. Currently, Constellium’s operations are focused mainly on Europe. In the next part, we will analyze how Wise Metals will add to Constellium’s revenues.

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