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Arconic Continues to Wait for Its Warren Buffett

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Jan. 23 2019, Published 8:05 a.m. ET

Arconic

Yesterday, Arconic (ARNC) fell 16% after the company announced that its board of directors has decided it will “no longer pursue a potential sale of the company as part of its strategy and portfolio review.” Arconic was reportedly in talks with Apollo Global Management (APO) to sell itself.

Notably, Arconic was listed as a separate company in 2016 after Alcoa’s split. Alcoa’s (AA) split was announced in 2015 a few months after Berkshire Hathaway (BRK-B) announced the acquisition of Precision Castparts. While Alcoa’s split wasn’t totally unexpected, the price that Warren Buffett agreed to pay for Precision Castparts was most likely triggered by Alcoa’s split. However, Alcoa’s downstream business wasn’t totally comparable to Precision Castparts.

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Warren Buffett

Berkshire acquired Precision Castparts at a trailing-12-month EV-to-EBITDA of 13x. Warren Buffett himself admitted that the deal was expensive. The acquisition was seen as a proxy bet on the aerospace sector (BA) (GE).

Several issues

Meanwhile, since the split, Arconic has been affected by one issue or another. Some of Arconic’s products were used in London’s Grenfell Tower that caught fire in 2017. The same year, Arconic’s CEO had to resign following a controversy. The lucrative aerospace component market (SPY) has also been witnessing a transition that’s hurt the valuation of companies in that space.

Meanwhile, while Warren Buffett placed his faith in the aerospace component space, Arconic seems to be having a tough time finding a buyer. According to Bloomberg, columnist Brooke Sutherland said, “Among the complicating factors were volatility in the high-yield debt market and belabored negotiations over the fate of a cladding business implicated in London’s Grenfell Tower fire in 2017.”

Read Following Warren Buffett Might Not Always Yield Profits to read more about Buffett’s recent transactions.

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