Alcoa Unleashes the "Value-Add"

By Fool.com

It's a difficult start to the week for U.S. stocks, with the Dow Jones Industrial Average and the S&P 500 down 1.33%, and 1.78%, respectively, at 12 p.m. EDT.

If you want evidence of the seismic, wide-ranging changes ushered in by the rout in commodities prices -- the price of oil, in particular -- you simply need to glance at the headlines in the business pages of a high-quality daily.

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From today's Financial Times (print edition):

And on the home page of the Financial Times' website:

Aluminum giantAlcoaannounced this morningthat it will split into two separate companies:

  1. An upstream company that will remain focused on bauxite mining, alumina refining, and aluminum production, and will keep the name Alcoa.
  2. The "Value-Add Company" (still to be named) that will be a "premier provider of multi-material products."

According to the announcement, far from toiling away in a dreary cyclical market,

Guess which of the two businesses Alcoa CEO Klaus Kleinfeld will remain at? (Hint: It's the sexier one.)

Alcoa CEO Klaus Kleinfeld. Source: European School of Management and Technology.

The announcement of the breakup does not come as a tremendous surprise. Although the company had previously ignored calls for a breakup, paying lip service to the advantages of its "vertically integrated" model, it was clear that Alcoa had been ramping up what the company had already begun referring to as its "value-add portfolio." That portfolio has very different characteristics from, and limited synergies with, the aluminum business, which is cyclical and extremely competitive.

Just this March, Alcoa announced the acquisitions of RTI International Metals, a supplier of titanium and specialty metal products and services, and privately held TITAL, a leading manufacturer of titanium and aluminum structural castings for aircraft engines and airframes.

Both acquisitions were complementary with last year's purchase of Firth Hixson, a leading supplier of aerospace jet engine components. Roughly 40% of the Value-Add company's pro forma revenues for the 12 months through June 30, 2015, were from the aerospace market.

The Value-Add Company deserves its (temporary) name. Supplying precision-engineered components in a market with a limited number of competitors is a very good business that "provides a return above the cost of capital," to quote today's press release.

There is a reason Warren Buffett was willing to make Berkshire Hathaway'slargest ever acquisition by acquiring Firth Hixson competitor Precision Castpartsin a deal worth $37 billion -- at what he himself admitted was a "very high [price-to-earnings] multiple for us."

For Kleinfeld, this looks like a logical outcome of his drive to transform Alcoa. As he waves goodbye to the "old" Alcoa (he will remain as chairman during a transitional period), I don't imagine he'll be singing "Breaking Up Is Hard to Do."

The article Alcoa Unleashes the "Value-Add" originally appeared on Fool.com.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway. The Motley Fool recommends Precision Castparts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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