Although the consensus seems to be that Alcoa’s (AA) split could help create long-term shareholder value, there remain some unanswered questions. Please note that a lot of these concerns should become clear once Alcoa files a Form-10 with the SEC (Securities Exchange Commission). Note that the recent experience with splits in the commodity business hasn’t been very pleasant. South32 (SOUHY) spun off from BHP Billiton (BHP) last year. It fell steeply after it was listed as a separate entity.
Currently, Alcoa’s upstream and value-add business work in tandem. The upstream business provides the primary aluminum that the downstream business uses in its fabrication. Though the businesses will continue to work together, Alcoa admitted that we could see some dis-synergies from this split.
Alcoa has underfunded pension funding of ~$3.3 billion as of December 31, 2015. It will be interesting to see how the pension liabilities are divided between the two new companies. Note that much of these pension liabilities could go toward Alcoa’s legacy upstream business. Alcoa has started to expand its value-add business in a big way only over the last few years. However, the new Alcoa might not be able to absorb a large part of these pension liabilities due to the depressed commodity price environment.
Alcoa has a total outstanding debt of ~$9 billion as of March 31, 2016. After the split, Alcoa plans to retain most of its debt with Arconic, which will house the value-add business. This approach would mean that Arconic could have a higher leverage ratio. A higher ratio could impact Arconic’s valuation multiples as well as its credit rating.
In the next part of this series, we’ll see how Alcoa’s credit rating profile could be impacted by the split.