The aerospace industry is a heavy user of Alcoa's products. Image source: Alcoa.
For more than a year, Alcoa Inc (AA +0.00%) has been working toward splitting into a separate mining and materials company that will retain the Alcoa name, and an engineered products-manufacturing company that will be called Arconic. But the company ran into a potential roadblock earlier this year when it struggled to reach a mutually satisfactory agreement with longtime partner Alumina Limited (ADR)(AWCMY +0.00%)regarding how the Alcoa split would affect Alcoa World Alumina and Chemicals, or AWAC, the joint venture between the two companies.
Well, there's good news. After going so far as both companies filing suit, Alcoa and Alumina agreed to amend the joint venture agreement earlier this month. With this agreement now in place, Alcoa has cleared a major hurdle to its plans to split its upstream business from its engineered-products operation.
Alcoa also recently announced the addition of three board members for the future Arconic, another major step toward a likely separation before the end of the year.
Updated agreement better aligns interests for Alumina and Alcoa
Alcoa and Alumina have worked together for many decades. The AWAC joint venture, which is 60% owned by Alcoa and 40% by Alumina, is the world's biggest bauxite and alumina miner and producer, making it strategically important to both companies. In short, Alumina's concerned that the Alcoa split could have an impact on AWAC, particularly in regards to the debt liabilities of the new Alcoa that will emerge from the existing company.
However, both companies were able to reach a new agreement before the case went to trial. Here are some of the key changes, from the SEC filing:
In addition, effective on completion of the separation, certain changes will be made to the joint venture agreements to simplify AWAC's dividend and cash management policies. AWAC will generally be required to distribute at least 50% of the prior calendar quarter's net income of each AWAC company, and certain AWAC companies will also be required to pay a distribution every 3 months equal to the amount of available cash above specified thresholds. The future Alcoa Corporation has also agreed that, after the separation, it will obtain a limited amount of debt funding for the AWAC companies to fund growth projects, subject to certain restrictions.
One of the key parts of the change is noted in the last sentence, with Alcoa agreeing to obtain debt funding to help fund AWAC's growth in the future.
Alcoa names three future Arconic board members
On September 7, Alcoa announced the appointment of former Leidos Holdings executive Amy Alving, former Providence Equity Partners senior advisor Julie Richardson, and chairman of Delphi Automotive, Rajiv Gupta, to the board of directors of Arconic, which will be the engineered-products company following the separation. In addition to the three named above, the Arconic board will include:
- Former Medtronic CEO Arthur Collins, Jr.
- Alcoa chairman and CEO Klaus Kleinfeld
- Private investor and Delphi board member Sean Mahoney
- Former Merrill Lynch chairman and CEO E. Stanley O'Neal
- Former chairman and CEO of TRW Automotive John Plant
- Massachusetts Institute of Technology president L. Rafael Reif
- Former CEO of Alcatel Lucent Patricia Russo
- Former CFO of Spirit Aerosystems Ulrich Schmidt
- WPP plc CEO Martin Sorrell
- Former Tata Sons Limited chairman and former chairman of the major Tata Group companies, Ratan Tata
Splitting into Arconic and Alcoa on track by year-end, but long-term benefits will take time to prove
At this point, it's largely a foregone conclusion that Alcoa will be two separate companies by the end of 2016. What's not so clear at this stage is whether this move will truly unlock additional shareholder value.
The resulting companies will be more targeted investments -- one a pure-play materials producer and miner in Alcoa, the other an engineered-products manufacturer in Arconic -- but that's not a guarantee that the market value of the separate companies will exceed Alcoa's combined value. If the separation results in two companies that are better at what they do than Alcoa is today, then investors will benefit from the split. However, the answer to that question won't become apparent for some time to come.
