Alcoa's Plans to Split Concern Partner Alumina

Alcoa Inc. has yet to detail how its debt will be split over its two new companies, but joint venture partner Alumina Ltd. is trying to make sure it doesn't get burdened by the aluminum maker's bills.

Alumina's concerns have led to an exchange of words and a series of meetings between the two companies, and to a lawsuit brought by Alcoa against its Australian partner. While the dispute isn't expected to derail Alcoa's plans to separate itself, Alumina's message is clear: Don't pass off your liabilities to us.

"They're worried about the debt," said CRT Sterne Agee analyst Joshua Sullivan, adding that Alumina is likely concerned about potential credit rating changes on its interest in the companies' partnership.

Alcoa and Alumina have been joint-venture partners since the 1960s in AWAC, or Alcoa World Alumina and Chemicals, the world's biggest producer of alumina and largest bauxite miner. Alcoa owns 60% of the venture, while Alumina holds the rest.

In September, New York-based Alcoa unveiled plans to boost its sagging stock market value by dividing its more profitable assets—those focused on the aerospace and automobile industries—from its less promising mining, refining and smelting business, dragged down by the commodities bust.

Alcoa spokeswoman Monica Orbe said the transaction is still on track to be completed during the second half of this year.

In a statement, Alumina said it has concerns over the split's implications on AWAC.

"Alumina has serious concerns that the proposal as described by Alcoa will result in a material adverse change in the nature, size, scope and financial wherewithal of Alumina's partner in AWAC," the company said, alleging that Alcoa would "exit AWAC and introduce a new and financially weaker entity into the AWAC partnership."

Mr. Sullivan said he expected Alcoa to signal in a forthcoming regulatory filing, known as a Form 10, how it will structure its split. At that point, investors will get a read on how Alcoa plans to handle its debt—most importantly, its big pension obligation.

Alcoa said it was planning to file its Form 10 in June.

Ahead of the filing, Alumina is "looking for concessions," Mr. Sullivan said, adding that Alcoa's suit "adds an element of risk to the timing" of the transaction.

Alcoa said consent from Alumina isn't needed and filed its lawsuit to defend its right to split the company as Alcoa sees fit.

"There is nothing in the parties' agreements regarding AWAC that provides [Alumina] with consent or any other rights with respect to Alcoa's separation," Alcoa said in its suit. Ms. Orbe called the suit a pre-emptive measure.

According to Alcoa, the split won't affect assets that are part of the joint venture. Alcoa's interest in AWAC comprises its raw-metals assets, businesses Alcoa has said would remain as the namesake entity. The new entity, an array of businesses which make everything from truck wheels to lightning-resistant airplane fasteners, will be called Arconic. Chief Executive Klaus Kleinfeld will serve as chief executive of Arconic, and Alcoa has said he would serve as chairman of the namesake entity "for the critical initial phase."

Alumina, pointing to rights under the AWAC agreement, said Alcoa's proposed separation triggers consent and first-offer rights—meaning Alumina believes it needs to sign off on Alcoa's split and that it wants to maintain the right to potentially bid for certain Alcoa assets or solicit "various offers, including for the Alcoa interest in AWAC companies," Alumina said in its statement.

Alumina's concerns seem consistent with frustrations expressed by other investors, said Rosenblatt Securities analyst Chris Olin. Some investors are worried "that the new Alcoa business could be under considerable financial distress post-spinout," he said, pointing to the low price of aluminum that will make it "difficult for the primary metals segment to generate a sustained profit."

Alcoa, for its part, has said splitting the businesses would enable it to sharpen its focus and make each entity individually more attractive to investors.

Mr. Olin also nodded to uncertainty over how Alcoa will separate out its debt and health care liabilities. "It seems like [Alumina is] looking for greater protection," he said.

Write to Lisa Beilfuss at [e-mail]

(END) Dow Jones Newswires

May 31, 2016 17:45 ET (21:45 GMT)

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