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Alcoa (AA) to Divest Warrick Rolling Business to Kaiser Aluminum

Zacks Equity Research
·4 min read

Alcoa Corporation AA yesterday communicated that it signed an agreement to divest its rolling mill business located at Warrick Operations — integrated aluminum manufacturing site based in Indiana. The buying party of the transaction is Kaiser Aluminum Corporation KALU.

The transaction value has been fixed at $670 million, comprising of a cash component of $587 million and an assumed liability of $83 million. Yesterday, Alcoa’s shares declined 2.8%, ending the trading session at $19.90.

Notably, Kaiser Aluminum is a specialist in making specialty aluminum products (semi-fabricated). Customers majorly belong to consumer durables, electrical, aerospace, machinery, and other markets. The company is based in Foothill Ranch, CA.

Inside the Headlines

As noted, the to-be-divested business — comprising of coating and slitting lines, casthouse, cold mills and hot mill — is owned and operated by Alcoa Warrick LLC. The firm’s employee strength is 1,170 and its annual production capacity of flat-rolled aluminum is 310,000 metric tons.

Alcoa Warrick has a significant presence in the aluminum-based packaging market, making bottles, food containers and aluminum cans, in North America. It shipped 675 million pounds of aluminum in the last 12 months.

In addition, Alcoa agreed to engage in a ground lease agreement and molten aluminum supply contract with Kaiser Aluminum. The twin actions are part of the company’s divestment agreement. Notably, Alcoa will remain the owner of electricity generation facilities and aluminum smelter located at Warrick Operations.

Upon the receipt of regulatory approvals and satisfaction of closing conditions, the parties involved anticipate completing the transaction in first-quarter 2021.

Alcoa expects to incur transaction-related costs of $100 million, with half to be recorded in 2021, and others in 2022 and 2023. It believes that this divestment will hurt its sales, net income, and adjusted earnings before interest, tax, depreciation and amortization by $800 million, $45-$55 million and $90-$100 million, respectively.

The divestment is in sync with Alcoa’s initiatives to restructure its portfolio by disposing of non-core assets and focus more on core operations. It aims to generate cash worth $500 million to $1 billion through these actions. This February, the company divested the waste treatment business located in Gum Springs, AR.

Zacks Rank, Earnings Estimate and Price Trend

With a market capitalization of $3.8 billion, Alcoa currently carries a Zacks Rank #3 (Hold). The company is poised to benefit from enhanced productivity, efforts to improve balance sheet, cost-reduction actions and strategic actions. However, high costs and expenses (including that related to energy, maintenance, and seasonal labor) as well as tariff-related woes might be concerning.

In the past three months, Alcoa’s shares have gained 35.6% compared with the industry’s growth of 19.6%.

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The Zacks Consensus Estimate for the company’s bottom line is pegged at a loss of $1.44 for 2020 and earnings of 16 cents for 2021, suggesting improvement from the respective 30-day-ago figures of loss of $1.56 and loss of 16 cents. Also, the estimate for the fourth quarter of 2020 has improved from a loss of 5 cents to earnings of 3 cents in the past 30 days.  

Alcoa Corp. Price and Consensus

 

Alcoa Corp. Price and Consensus
Alcoa Corp. Price and Consensus

Alcoa Corp. price-consensus-chart | Alcoa Corp. Quote

Stocks to Consider

Two better-ranked companies in the Zacks Industrial Products sector are Altra Industrial Motion Corp. AIMC and Dover Corporation DOV. While Altra Industrial currently sports a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for the current year have been unchanged for these companies. Further, earnings surprise for the last reported quarter was 77.55% for Altra Industrial and 22.14% for Dover.

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Alcoa Corp. (AA) : Free Stock Analysis Report
 
Dover Corporation (DOV) : Free Stock Analysis Report
 
Kaiser Aluminum Corporation (KALU) : Free Stock Analysis Report
 
Altra Industrial Motion Corp. (AIMC) : Free Stock Analysis Report
 
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