Alcoa demerger could jump-start deals with Alumina Ltd, Rio Tinto and South32

Alcoa chief executive Klaus Kleinfeld says his company's plans to demerge its upstream and downstream businesses will give the company "optionality" for dealmaking, with analysts pointing to the potential for multi-billion dollar transactions involving Alumina Ltd, Rio Tinto and South32.

The US aluminium giant unveiled plans to split into two companies by the second half of 2016 after having bulked up its downstream unit through acquisitions over the past year. The upstream company will include its 60 per cent stake in the bauxite mining and alumina refining Alcoa World Alumina & Chemicals (AWAC) joint venture with Alumina as well as its global portfolio of smelters and casthouses.

The downstream company will provide aluminium products in the automotive and aviation sectors and presumably command a higher rating than the combined company's because the more volatile upstream business had been a drag on its price/earnings ratio. Alcoa shares closed 5.9 per cent higher at $US9.60 in New York after the demerger announcement, giving it a market value of $US11.9 billion.

"Clearly in separating these two companies it gives [dealmaking] optionality," Mr Kleinfeld told analysts.

JPMorgan analyst Michael Gambardella said there would be no savings or synergies created from the demerger – instead, it would increase overhead costs. As a result, he said the best way for Upstream Co to realise a significantly higher valuation would be to combine the business with another sizeable aluminium producer to enable it to cut costs and better control supply. Mr Gambardella named Rio's aluminium business as a prime candidate.

However, Rio has been quite upbeat about its aluminium division in recent times; it is understood it never seriously considered spinning it off even when many analysts and investors proposed it do so over the last few years.

In addition, there would be complications resulting from Alcoa's AWAC joint venture with Alumina. Alumina would have the preemptive right to purchase a 40 per cent stake in any bauxite and alumina assets bought by Alcoa's upstream division.

For that reason, other analysts think it is possible Upstream Co's first acquisition could be the purchase of Alumina. Mr Kleinfeld indicated Upstream Co would have a high non-investment grade credit rating, but if it lacked cash, a scrip deal could be possible as Alcoa is listed on the Australian Securities Exchange. Alumina has a market value of $3.4 billion and holds a key position in the upstream market.