Another Smart Alcoa Acquisition, but Is the Price Smart?

Commodities & Metals

Published: March 9, 2015 11:30 am

Last Updated: March 9, 2015 11:34 am

Alcoa Inc. (NYSE: AA) announced Monday morning that it would acquire RTI International Metals Inc. (NYSE: RTI) in a stock-for-stock transaction that values RTI at $1.5 billion including debt. The goal of this transaction is to not only grow Alcoa’s advanced technologies for more strength in its innovative power, but also to broaden its multi-material product suite.

Under the terms of the agreement, Alcoa will acquire RTI in a stock-for-stock transaction. RTI shareholders will receive 2.8315 Alcoa shares for each RTI share, representing a value of $41 per RTI share, based on Alcoa’s closing price on March 6, 2015.

RTI is a global supplier of titanium and specialty metal products and services for commercial aerospace, defense, energy and medical device markets.

As a result of acquiring RTI, Alcoa will expand its range of titanium offerings, add advanced technologies and materials, solidifying Alcoa’s position as a leading industrial innovator. In conjunction with that, the company will grow its value-added businesses and further strengthen its aerospace portfolio.

Looking forward at the company’s 2014 pro forma basis, aerospace revenues are expected to increase by 13% to $5.6 billion. Alcoa also expects a strong annual global aerospace market growth in the range of 5% to 6%.

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Klaus Kleinfeld, chairman and chief executive of Alcoa, said:

Alcoa is accelerating its value-add growth engine by acquiring titanium leader RTI. We are combining two innovators in materials science and process technology, shifting Alcoa’s transformation into a higher gear. RTI expands our aerospace portfolio market reach and positions us to capture future growth to deliver compelling value for customers, shareholders and employees

Recently Alcoa has felt some pressure from analysts, and it will take some getting used to. Merrill Lynch recently issued downgrades for both major aluminum producers, Alcoa and Century Aluminum Co. (NASDAQ: CENX).

Metals strategist Michael Widmer recently cut his aluminum price forecast and premium assumptions, noting a newly expected surplus of the metal versus a previously expected deficit. A strong U.S. dollar can drag the Midwest premium even lower, akin to the European premium, down 20% from its peak. Aluminum is still considered more defensive compared to other commodities.

For Alcoa, the brokerage firm cut its estimates based on the lower forecast price of aluminum. The 2015 earnings per share (EPS) estimate was decreased to $1.15 from $1.30, and the 2016 EPS estimate was moved to $1.15 from $1.55. Merrill Lynch downgraded Alcoa to Neutral and lowered its price target to $17 from $20, but the firm remains positive on the free cash flow and downstream growth.

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Shares of the aluminum giant were down 5% at $13.75 Monday morning. The stock has a consensus analyst price target of $18.78 and a 52-week trading range of $11.61 to $17.75. The company has a market cap of nearly $17 billion.

RTI shares were up a whopping 40% at $38.18, and shares hit a new all-time high just after the opening bell. The stock has a 52-week trading range of $20.92 to $38.87. In the first half hour of trading about 6.7 million shares had moved.

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