June 29, 2016 / 11:40 AM / 3 years ago

Alcoa spins off smelting business; aero, auto unit now 'Arconic'

CHICAGO (Reuters) - Metals company Alcoa Inc said on Wednesday it will spin off its traditional aluminum smelting business as part of its planned company split, with up to 19.9 percent of the new company owned by its business that serves aerospace and transportation industries.

The Great Smoky Mountains are shown in the background in this view of the Alcoa Aluminium plant in Alcoa, Tennessee. REUTERS/Wade Payne

The company to be spun off will be named Alcoa Corp and the “value-added” business that makes engineered products for growth markets will be named Arconic Inc, Alcoa said in a regulatory filing.

The split is due to take place in the second half of this year.

The new aluminum smelting arm will sell metal to the downstream business for an initial three years as part of the deal, although Arconic will also have the right to buy from other suppliers, it said.

The spinoff comes at a time when aluminum prices have hovered around historic lows. Many producers have accused China of selling metal into oversupplied global markets below market rates. China denies this and says excess capacity is a global issue.

Amid that downturn, Alcoa has been reducing its refining and smelting capacity and has focused on more advanced aerospace and automotive products.

In recent months the company has announced deals to provide a light but tough aluminum alloy for Ford Motor Co’s high-selling F-150 pickup and aerospace contracts including titanium seat track assemblies for Boeing Co’s 737 MAX, 777X and 787 Dreamliner.

Australia’s Alumina Ltd has raised concerns over the impact of Alcoa’s planned split on the pair’s bauxite and alumina production joint venture, Alcoa Worldwide Alumina and Chemicals (AWAC).

In May, Alcoa filed a lawsuit seeking a declaration that Alumina has no right to block the plan.

A trial will start on Sept. 20.

On Wednesday, Alumina said the spin-off would breach the venture’s agreements, and it cannot proceed without Alumina’s consent.

In 2015, Alcoa’s traditional upstream business had pro forma revenue of $11.2 billion, while its value-added business had revenue of $12.5 billion, the company said.

As part of the split, the new upstream business will have around $236 million in outstanding long-term debt. The new company will raise approximately $1 billion in new debt and provide for up to $1.5 billion in funding through a revolving credit facility.

Alcoa’s total debt in the first quarter was around $9 billion, so the lion’s share will remain with Arconic, the larger of the two companies post-split.

On a conference call with analysts, Alcoa Chief Executive Klaus Kleinfeld said the pension obligations of the new upstream business as of the end of 2015 will be around $2.6 billion, while the value-added business Arconic will have pension obligations of around $3 billion.

The company reiterated that Arconic will be an investment-grade entity, while the new Alcoa will be a “strong non-investment grade” firm.

In late trading, Alcoa shares were down 1.9 percent at $9.15.

Reporting By Nick Carey; Editing by Chizu Nomiyama and Nick Zieminski

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