Arconic (ARNC) announced that it has sold 60% of its stake in Alcoa (AA) and raised ~$890 million. According to Arconic, “The proceeds bolster the Company’s cash balance, which provides financial flexibility to pay down debt and/or pursue share repurchases, based on a relative-return assessment.”
In this article, we’ll analyze how these moves could impact investors.
As Arconic took over Alcoa’s consolidated debt, its leverage metrics increased after the split. On December 31, 2016, Arconic’s net debt stood at $6.2 billion. Arconic’s adjusted EBITDA was ~$1.5 billion in fiscal 2016. The company’s net debt-to-EBITDA is currently in excess of 4.1x, which is higher than some of the other companies in this space (CSTM) (WWD) (ITA).
We haven’t accounted for the proceeds from Alcoa’s stake sale in this calculation. Repaying debt would help bring down Arconic’s leverage ratios and could support the company’s valuation.
Generally, companies repurchase their shares when they feel that the stock is undervalued by the financial markets. As we noted previously, Elliott Management wants to oust Klaus Kleinfeld, Alcoa’s current chief executive officer. According to Dow Jones, Elliott Management’s regulatory filings reveal that the company finds Arconic (ARNC) “dramatically undervalued.”
Arconic could use the cash for share repurchases, which could provide a short-term upside for investors. Arconic’s management could be under pressure to show short-term results in a bid to counter Elliott Management’s onslaught.
As for Alcoa investors, the stock could still offer long-term value. You can read Must Know: Does Alcoa Look Set for a Solid 2017? to learn more about Alcoa’s near-term outlook.