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What Does Alcoa Really Plan to Achieve with Its Split?

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Split

As discussed previously, Alcoa (AA) will be splitting into two companies later this year. Alcoa will retain the upstream commodity business while Arconic will house the downstream business.

The graph above shows how the assets will be split between the two companies after the split.

Rationale for the split

Markets (DIA) have a totally different view of commodity and value-add component assets. After the split, markets will value Alcoa’s commodity and value-add business separately. This will help in individual price discovery of the two businesses.

Both Alcoa and Arconic will have separate characteristics and investment propositions. While the new Alcoa will be a pure-play upstream aluminum producer, Arconic will become a downstream engineering and fabrication company. As an investor, you can decide whether you want to stay in the cyclical commodity business or the value-add component space. Both businesses will have their own risk-to-return characteristics.

While Alcoa will count Century Aluminum (CENX), Norsk Hydro (NHYDY), Aluminum Corporation of China, Rusal, and Noranda Aluminum among its competitors, Arconic will be a major supplier to the aerospace sector. It will be a leading fastener and engine airfoil supplier. According to Alcoa, Precision Castparts (BRK-B), Allegheny Technology (ATI), Barnes Group, Carpenter Technology, Woodward, Kaiser Aluminum, and Constellium (CSTM) will be some of its comps in this space.

Value creation

As an Alcoa shareholder, you might like to know what kind of value the company’s pending split will create. In this case, value will depend on whether the two separate companies will be worth more than the combined entity. To answer that question, we’ll have to wait for the two companies’ listings, which are scheduled for the second half of 2016. However, we can surely look at the value propositions these two companies will offer. We’ll discuss this more in the coming parts of this series.

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