Earlier this month, Alcoa filed an S-3 with the SEC, a move that would authorize the metals giant to raise $5 billion in capital.
The shelf registration enables the company to give its balance sheet a 14% bump through the issuance of common stock, class B preferred stock, debt, and other types of securities.
It came just days after Alcoa's second quarter earnings call, when executives impressed the market with the company's 23.1% EBITDA margin, an increase of 4% over results from the first quarter.
As a preliminary filing, the details are limited -- there is no clear indication what mix of securities the company will use to raise the funds, let alone the price and quantity of each. That leaves us to speculate as to how the company will raise the funding, and the impact it might have on shareholders.
What will the financing mix be?
In Alcoa's Q2 earnings call, management highlighted a goal of attaining a 30-35% debt-to-capital ratio in 2014. At the end of the second quarter, the company sat at 35.4%. It seems doubtful the company would finance primarily through bonds if it is already above its desired debt level. Based on a valuation of $18 per share, the higher end of analysts' short-term price targets for the company, and using the 35% debt-to-capital ratio as a ceiling, Alcoa could use debt to raise roughly $1.7 billion.
Alternatively, Alcoa could drop its debt-to-capital ratio to around 31% by raising the $5 billion through common and preferred stock.
Per the S-8 Filing, Alcoa can issue up to 1.8 billion shares of common stock. There are currently 1.174 billion outstanding, plus 93 million held in the company's treasury, and an additional 95 million shares set aside for stock-based compensation. All told, Alcoa has either issued, or committed to issuing 1.36 billion of the 1.8 billion shares the company is authorized to distribute, leaving just under half a billion shares at its disposal.
If the company chose to, it could raise all of the capital through the issuance of roughly 294 million shares. Doing so would raise shares outstanding to 1.47 billion.
Alcoa already added just over 100 million shares to its outstanding total earlier this year, and it would be aggressive to increase shares outstanding by almost 400 million in a relatively short period of time.
Preferred stock is an option, though it would need to be used in tandem with another security type. Alcoa is only authorized to issue up to 10 million Class B shares and is in the process of retiring all of its Class A shares.
Short-term EPS Impact
The company posted earnings of $776 million in the second quarter, roughly $0.12 on a per share basis. An average of analysts' projections anticipates the company will post EPS of $0.59 for 2014. They see growth for Alcoa, projecting an EPS of $0.81 for 2015, but for shareholders, some of that growth could be curbed by dilution.
If the company were to use exclusively common stock for the $5 billion offering, the same earnings estimates would yield EPS around $0.65 – a 12% increase, but a far cry from the analysts' optimistic projections. Under the 35% debt-to-capital scenario, the company would issue roughly 183 million new shares, resulting in a revised EPS of $0.70.
Given the sheer size of the offering, the company may look to slowly roll-out shares to prevent dramatic dilution.
Of course, Alcoa filed the S-3 because it had a plan and needed funding. The form notes that the company will put the proceeds toward "general corporate purposes," which could include capital expenditures, working capital, debt refinancing, and acquisitions.
Last month, the company announced a $2.85 billion deal to acquire Firth Rixson, a manufacturer of jet engine components. This move, coupled with corporate plans to break ground on a new $90 million factory in Indiana and spend $100 million to expand an existing aero component factory in Virginia, signal that the company is diversifying into downstream manufacturing.
And perhaps it isn't done just yet. With $5 billion at its disposal, Alcoa would be poised to make another acquisition, or invest in the company's internal manufacturing capabilities. Both of which would, theoretically, be accretive.
Case and point, the Firth Rixson acquisition is estimated to produce $1.6 billion in revenue and $350 million in EBITDA in 2016.
Alcoa's current financing structure and management's vision make it seem like the majority, if not the entirety, of this offering will come in the form of equity. With the issuance of new stock, Alcoa investors may experience dilution in the short-term, but might see the company put that capital to use shortly, giving a more optimistic medium to long-term outlook.
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