Alcoa (AA) just fired a warning shot to any would-be acquirers. "We aren’t for sale."  There has been speculation around for some time that they could fall prey to an acquirer as other metals and mining companies have grown around the world, and this was something Cramer and others have referred to several times recently.

The company just announced a new share buyback plan, a hike to its dividend, and a debt restructuring.  It wants to repurchase up to 10% of the stock (about 87 million shares), it raised the dividend from $0.60 to $0.68, and is extending maturities on its debt.  This is not a drastic leveraging of the balance sheet, but it is still a corporate defensive mechanism.

The debt maturity extension is an exception to the "we aren’t for sale" thought, but this is effectively going to chew up more than $2.5 Billion in cash and the dividend hike will create another $70 million committed to outflows from the company. Part of the filing includes up to $2 Billion in debt.  S&P just lifted its debtrating to Stable from Negative in December and my partner Doug commented that it was undervalued at the $30 mark.

The company has improved its balance sheet, but this feels and looks like a leveraging of the balance sheet to reward CURRENT shareholders.  This tends to drive up share prices in today’s economy, yet makes the remaining company down the road have potentially a more leveraged balance sheet that a prospective buyer might shy away from.  The company still is not really expensive even on a leveraged basis, but this is one strategy that companies can use to remain independent.  Management is also signaling that they are feeling better about the future when they take actions like this, otherwise they run the risk of burning up today’s assets that might be needed on a rainy day.

Shares are now up 3% on the day at $31.25, and that is close to 25% above the $26.39 yearly low.  Alcoa’s market cap is roughly $27 Billion and it is one of the thirty components of the Dow Jones Industrial Average.

As they used to say: "You Make The Call!"

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Jon C. Ogg
January 19, 2007

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