What’s Next for Arconic After Unsettling Flip-Flop on a Sale?

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Alcoa (AA) is one of those companies that even casual investors have a passing familiarity with, even if they don't know much about its business. The aluminum giant with the AA ticker was, for many decades, the "New Hampshire" of earnings, reporting first each season. But then in late 2016, it split in two, allowing the aerospace and automotive parts manufacturing side to go its own way as Arconic (HWM 2.91%).

Fast-forward a few years, and Arconic management put their company up for sale and received a bid that shareholders seemed to like. This leads to this week's news: Arconic has changed its mind, says it's not for sale at all, and pulled the plug. The market was not pleased.

In this segment of the MarketFoolery podcast, host Chris Hill is joined by Taylor Muckerman of Motley Fool Canada to dig into the background of these events, try to read the tea leaves about what's coming, and consider the investment thesis for the manufacturer.

A full transcript follows the video.

This video was recorded on Jan. 22, 2019.

Chris Hill: We have to start, though, with the stock of the day. This is a reminder that you don't have to be going up to be the stock of the day.

Taylor Muckerman: [laughs] You do not. Most likely, you're not going up, in this market.

Hill: In this case, it's Arconic, which is the maker of aluminum parts that was spun out of Alcoa. Shares of Arconic, now they're down about 16%. Earlier, they were down about 25% because the board of directors said that the company is no longer for sale. And it had been for sale. And Apollo (APO) had ponied up somewhere north of $10 billion to buy them. The fact that the board has pulled the plug on this has a bunch of investors saying, "No, we're out."

Muckerman: It's a pretty wild story. This company was, like you mentioned, spun out of Alcoa. It was the darling of the deal when they split the aluminum producer and then the parts producer, which is Arconic, out, because it has exposure to aerospace, commercial transport, the oil and gas market. So investors were really excited about this company. And then, in 2017, their cladding business provided aluminum parts for a building in England that caught fire, and they didn't perform as well as they should have. So, that's been an overhang for this business since 2017. As early as August of last year, Reuters came out with a story saying that they're going to put the cladding business up for sale, potentially the whole business. And that's what ended up happening. Even as late as earlier this month, this company was definitely for sale. They were going to go for $22 for Apollo Global. Now, this morning, the management team and the board came out and said that they don't believe that they've received any offers that justify the value of this company for shareholders. And so now, [laughs] shareholders are really feeling the pinch with shares down as much as 25% or more in trading today.

Hill: The stock is just under $17 a share. By my calculations, this puts it at a 30-year low.

Muckerman: [laughs] Yeah.

Hill: [laughs] So, I mean... I kind of am. On the one hand, I think, "Wait a minute, someone's going to pay for this business." I'm wondering if the 30-year low seems like a buying opportunity, or if anyone who's looking at this should wait until, I don't know, some more information comes out of the board of directors. I will say that it's pretty unsettling to see a reversal like this. I'm not a shareholder, but anytime you have -- and maybe that's part of the reaction that we're seeing with the stock today. There wasn't really any indication that anything other than a sale was going to happen. And for them to just completely pull the plug, and not even say, "We think it's worth more than that," or, "We're saying no to this offer, but we're still open to negotiation," it's like, "No. We're not for sale." That's really throwing people for a loop.

Muckerman: Yeah, it voices a lot of distrust from investors for management because they had multiple offers. Up until they announced and said no, this was all going through. I definitely think the sell-off maybe a little bit overdone. Investors are maybe just like, "You know what? We're out, because now we have no clue what management is thinking," and rightfully so. If you have exposure to oil and gas market right now, not the best place to be. Aerospace is still a booming business, but not necessarily growing gangbusters. So it seemed like this might have been a great deal for the investors, and now they're just like, who knows what's going to happen? This won't be the last investors hear about Arconic and a potential sale moving forward. So, if I was considering, I would definitely still pump the brakes a little bit before jumping in and wait to see what else comes out of this before buying shares.