Alcoa plans to split up operations

Alcoa Inc. (AA), the aluminum producer dragged down by the metal’s price decline, stands to unlock 63 percent in added value for shareholders by splitting itself up.

Alcoa, the 124-year-old seller of metals for use in beer cans and airplanes that plans to release third-quarter results after the U.S. market closes today, slumped about 50 percent in the past 18 months as aluminum prices dropped to an almost three-year low. That left the New York-based company trading at a lower multiple to book value than 94 percent of peers in the aluminum industry, and at a 60 percent discount to its sales, according to data compiled by Bloomberg.

Aluminum billets cut to various lengths move along the production line at the Alcoa Inc. Mt. Holly plant in Goose Creek, South Carolina. Photographer: Stephen Morton/Bloomberg

With analysts projecting average aluminum prices during the next three years won’t surpass 2011’s level, Davenport & Co. said Alcoa could boost value by untethering its specialized products such as aerospace studs from its commodity-driven mining and smelting operations. By valuing Alcoa’s four divisions separately, the combined entity would be worth $14.82 a share, 63 percent more than yesterday, according to the average of four analysts’ estimates compiled by Bloomberg. The units that make flat-rolled aluminum sheets and engineered products are together worth more than Alcoa’s entire $9.73 billion market value, said Dahlman Rose & Co.

“The commodity side is what keeps punishing them,” John Stephenson, a fund manager at First Asset Investment Management Inc. in Toronto, who oversees about $2.7 billion including Alcoa shares, said in a telephone interview. Without aluminum processing, the specialized-products business would be a more “profitable company. You have less of a drag on earnings, you have less earnings volatility. That, to me, would be a more sensible approach.”