Alcoa forges smart deal out of metal woes

Alumina

26/02/2024 12:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Antony Currie
       MELBOURNE, Feb 26 (Reuters Breakingviews) - Falling
commodity prices and rising costs are a recipe for desperate
dealmaking. Yet U.S.-listed Alcoa's  AA.N  all-stock $2.2
billion offer for Alumina  AWC.AX  has something for
shareholders on both sides. It helps that this is no ordinary
takeover.
    The target's sole asset is a 40% stake in its joint venture
with its wannabe new owner. That operation has encountered some
problems of late. Last month's decision to mothball a refinery
for alumina - a feedstock for aluminium, whose price dropped 18%
last year - will cost the duo up to $200 million over the next
two years. Meanwhile, problems at a mine in Western Australia
mean the pair will only be able to extract lower-grade bauxite
for the next three years, reducing revenue. 
    Such issues are hitting the junior partner harder than $5
billion Alcoa which owns other assets. Alumina has halted
dividends and its financial gearing has increased, sparking some
concerns it may have to raise capital.
    Yet its board has managed to wangle a 13% premium out of
Alcoa. On the face of it that's hard for the buyer to justify:
it's already the majority owner of the assets, so there's little
fat to trim - just $12 million of savings, per Alcoa CEO William
Oplinger. Once taxed and capitalised, that'd cover just a third
of the $260 million premium.
    Alcoa would extract other benefits, though. First, owning
100% of the venture will simplify running the business. That
includes removing the right Alumina currently has to veto
certain projects Alcoa might be interested in developing. 
    Moreover, securing the deal means the U.S. metals producer
would be able to utilise some A$490 million ($321 million) of
dividend-related tax credits its quarry holds. Alumina's
investors may rankle at losing direct access to these. But with
shareholder payouts off the table for a while it's effectively
dead money. In return, they will end up with 31% of a larger
company that still pays dividends.
    With miners of all manner of commodities from nickel to
lithium struggling with higher outlays and lower income, an
Alcoa-Alumina deal looks as close to a win-win as either side
could expect.
    Follow @AntonyMCurrie on X
         
    CONTEXT NEWS 
    The board of Australia-listed Alumina on Feb. 26 said it
intends to recommend an all-share offer from Alcoa valuing the
company's equity at some A$3.35 billion ($2.2 billion). 
    Alumina shareholders will receive a consideration of 0.02854
Alcoa shares for each Alumina share. The offer is roughly
equivalent to A$1.15 a share, a premium of 13%, based on the
closing price of each company's stock on Feb. 23.
    Alumina's sole asset is a 40% stake in Alcoa World Alumina
and Chemicals, a joint venture 60%-owned by Alcoa.

 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  CURRIE/ 
antony.currie@thomsonreuters.com; Reuters Messaging:
antony.currie.thomsonreuters.com@reuters.net))