The RTI acquisition
Alcoa (AA) has announced the acquisition of RTI International Metals (RTI) at an enterprise value of $1.5 billion. Alcoa will issue 89 million new shares to acquire RTI. It will also assume $517 million of debt in the form of convertible senior notes.
RTI has $330 million of cash on its balance sheet, which will be transferred to Alcoa. The transaction is expected to close in three to six months, subject to regulatory and RTI shareholders’ approval.
The acquisition’s financial mpact
The above chart shows the financial impact of Alcoa’s RTI acquisition. Alcoa expects RTI International Metals to contribute $1.2 million to its 2019 revenues. Currently, RTI’s EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is 14.5%. Alcoa expects RTI’s EBITDA margin to increase to 25% by 2019.
Alcoa’s engineered products division, which produces value added products, had an EBITDA margin of 18.9% in 4Q14. Alcoa’s EBITDA margins have come down since the Firth Rixson acquisition. Its EBITDA margin in 4Q without the inclusion of Firth Rixson was 20.6%.
Alcoa expects RTI to positively contribute to its earnings per share (or EPS) from the third year onward. It also expects to realize synergies of $100 million from this transaction.
Currently, RTI’s EBITDA margins are lower than Alcoa’s. This would lead to EPS dilution in the initial years. Analysts view EPS dilution as a negative sign in any acquisition. This could be one possible reason Alcoa’s share price came down after it announced the acquisition of RTI International Metals.
The acquisition strengthens Alcoa’s presence in the aerospace industry, which has been growing at a fast pace. However, lower crude oil prices can negatively impact the aircraft replacement market. Precision Castparts Corp. (PCP) and Alleghany Technologies (ATI) also supply components to aerospace companies. ATI currently forms 3.42% of the SPDR S&P Metals and Mining ETF (XME).
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