Alcoa Shares Surge on Plan to Split Into Two Companies

By Nick Carey

CHICAGO -- Alcoa (AA) said Monday it will split into two companies to separate its struggling aluminum smelting operations from production of lightweight metals for its faster-growing aerospace and automotive business.

The news sparked a rally in Alcoa's shares, which were up nearly 6 percent at $9.60 in premarket trading.

Falling commodity prices and a glut of aluminum have battered Alcoa stock, which before the news, had fallen more than 42 percent this year.

The split will separate the cyclical commodity business that excels during demand upswings from a high-technology business benefiting from rising demand for new alloys and titanium for planes and automobiles.

The split is expected to be completed in the second half of 2016. The traditional aluminum business will retain the Alcoa name, while the newer company, which Alcoa said would have higher value products, is still unnamed.

"We are interested in creating value for our customers, for our shareholders, for our employees, and at this point this is the option we see that creates the biggest value," Chief Executive Officer Klaus Kleinfeld told Reuters.

%VIRTUAL-pullquote-The commodity business was a significant drag, not only on valuation but on the resources of the company.%Josh Sullivan, an analyst with Sterne Agee CRT, said Alcoa had already been in the process of a transition, including its recent acquisition of RTI International Metals.

"The commodity business was a significant drag, not only on valuation but on the resources of the company," Sullivan said.

In a conference call with analysts Alcoa said that as of Dec. 31, its pension was underfunded by about $3.3 billion.

Executives said as the company works out the details of the split it will allocate debt and pension liabilities "in a manner that is prudent for the two businesses to have the balance sheet" Alcoa is targeting.

Regarding credit ratings, Alcoa said it is targeting investment grade for its "value-added" business and "strong non-investment grade" for its legacy business.

The company has bet on growth from higher-margin titanium and high-strength aluminum sales to the aerospace industry, as its order book swells for airplane production and amid renewed global spending on automobiles.

Still, efforts by the world's third-largest producer of aluminum to address the diverging trends had given conflicting messages for investors, according to sources close to the company.

The split is expected to be completed in the second half of 2016 and the traditional aluminum firm will retain the name Alcoa, the company said.

Kleinfeld will be chief executive of the new, unnamed entity and will remain chairman of Alcoa throughout the transition period.

"We believe both entities have gotten into a shape that they are competitive and sizeable and they can stand on their own," Kleinfeld said.

The company didn't provide a timeline for choosing a CEO for Alcoa after the split. The division of the company doesn't need shareholder approval, sources familiar with the matter said.

The company's financial advisers are Morgan Stanley (MS) and Greenhill & Co. The legal adviser for the split is Wachtell, Lipton, Rosen & Katz.

-Lewis Krauskopf contributed reporting.