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UPDATE 2-Hydro, Orkla merge aluminium units to cut costs
October 15, 2012 / 5:41 AM / in 5 years

UPDATE 2-Hydro, Orkla merge aluminium units to cut costs

* New JV will be jointly held by Hydro and Orkla

* Aims to cut costs amid global downturn

* Orkla shares rise 5 pct, Hydro up 2 pct

* Orkla to get NOK 1.8 bln (Adds detail, analyst comment)

By Joachim Dagenborg and Balazs Koranyi

OSLO, Oct 15 (Reuters) - Norwegian companies Norsk Hydro and Orkla are to merge their extruded aluminium units to cut costs and create a market leader in a sector suffering a global downturn.

Sapa, a 50/50 joint venture with 47 billion Norwegian crowns ($8.2 billion) annual sales, will pay conglomerate Orkla 1.8 billion crowns because it is putting more assets into the new company than aluminium group Hydro.

The deal will cut annual costs by 1 billion crowns and is likely to lead to job losses.

“We are going through difficult times in our markets and the goal is to restructure to create a competitive company,” Orkla chief executive Aage Korsvolt told reporters on Monday.

The deal shows that Hydro and Orkla are ready to quit a weak segment within a struggling industry, analysts said. Extruded aluminium is used for everything from bench seating in sport stadiums to retail display units to car parts.

The deal’s terms allow either owner to initiate an initial public offering (IPO) of Sapa after three years.

Brokerage Pareto said it valued Sapa at around $2.5 billion and the group would be a global leader in the segment.

Hydro stock was up 1.5 percent at 26.82 crowns at 1110 GMT, while Orkla was up 5.6 percent at 47.75 crowns, with the broader market 0.5 percent higher.

“It adds value for both sets of shareholders,” Sparebank 1 Markets analyst Henrik Schultz said. “We have actually been hoping for this for years,” he said, adding the deal could add up to 1 crown to the value of Hydro shares.

“The agreement between Orkla and Hydro establishes the world’s largest company with this type profile,” Norwegian industry minister Trond Giske said. “This is one of the largest transactions in the Norwegian market ever,” Giske said on behalf of Hydro’s biggest shareholder with a 34 percent stake.

JOB LOSSES

“There is reason to believe that there will also be consequences for jobs, though that would have happened anyway due to the weak European markets in particular,” Hydro chief financial officer Joergen Arentz Rostrup said.

Aluminium prices touched a three-year low in August as overcapacity, high stock levels and a global economic slowdown cut deep into demand.

While primary producers have cut capacity, demand for secondary products was expected to remain sluggish for an extended period, especially with China’s growth outlook dimming.

“Norsk Hydro’s extrusion business is a low margin, low returns business,” Goldman Sachs said in a note. “Hydro’s decision to merge the extrusion business with Orkla’s Sapa should allow for greater pricing power in the sector, resulting in stronger margins and higher profitability.”

Sapa will be a key player in the building, construction and transport industries and will have leading positions in Europe and North America, and strong footholds in markets in Argentina, Brazil, China, India and Vietnam.

Orkla also said it planned to sell its rolled products operations in a separate deal, which would also involve its mills in Shanghai, China and in Finspang, Sweden.

Orkla, which as been selling non-core assets to focus on branded consumer products, said it considered Sapa a non core asset and would exit the business if it went public. ($1 = 5.7034 Norwegian crowns) (Editing by Chris Gallagher and Dan Lalor) (Balazs.Koranyi@thomsonreuters.com; +47 22 93 69 62; Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net)

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