How Alcoa Inc’s split could finally bring it together with Alcan – by Jonathan Ratner (National Post – September 29, 2015)

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Alcoa Inc.’s plans to split into two publicly traded companies isn’t expected to be completed until the second half of 2016, but that won’t stop it from looking to the future, which may mean some big acquisitions down the road.

Dividing the upstream and downstream businesses will draw attention to the company’s sum-of-the-parts valuation, but Michael Gambardella at J.P. Morgan doesn’t think that represents real value creation. The analyst thinks the plan could lead to modestly higher overhead costs and won’t generate any savings.

He suggested Alcoa would be wise to take a second step and combine the upstream business with another large aluminum producer, which should create significant additional value in a depressed metal price environment.

“This potential value creation could occur from significant cost cutting opportunities with greater scale and better market conditions from supply cuts, and potentially from further consolidation activities triggered by such a transaction,” Gambardella told clients.

Alcoa tried to do this in 2007 when it made a hostile offer for Alcan Inc., which was eventually bought by Rio Tinto Group. The analyst thinks a similar-sized producer, including Rio Tinto’s aluminum business, would be a good fit for Alcoa.

“This previous offer by Alcoa leads us to believe that Alcoa potentially thought that the Alcan aluminum assets (now the majority of Rio Tinto’s aluminum assets) were the best fit in the industry with its own upstream assets,” Gambardella said.

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