Activist Elliott Takes Stake in Alcoa--3rd Update

By John W. Miller 

Hedge fund Elliott Management Corp. has accumulated a 6.4% stake in Alcoa Inc. following the company's decision in September to split in two, spinning off its more diverse parts-making business from its raw aluminum operations.

The disclosure, announced in a securities filing, marked the second activist move this year on a major U.S. metals and mining company, after Carl Icahn's investment in Freeport-McMoRan Inc. Investors appeared to view the move as an endorsement of Alcoa's plan, sending its shares up 5.6% at $12.24 in New York trading.

Representatives of Elliott, a New York hedge fund founded by Paul Singer, have been meeting with senior Alcoa executives, including Chief Executive Klaus Kleinfeld. Elliott's analysis that Alcoa is the most undervalued of U.S. metals and mining firms prompted the investment, according to people with familiar with the matter.

The sector has been battered by the downturn in metals prices, and Elliott studied possible investments in other companies. It concluded that Alcoa was the best target because of its thriving aerospace and automotive business, which, the hedge fund believes, has been overshadowed by the commodity bust, these people said.

Alcoa was advised of the share purchase "several weeks ago," the New York-based company said in a statement.

Prices for raw aluminum have fallen by over 40% since 2011, and Alcoa's share price has fallen by a similar amount.

That decline, Alcoa and Elliott believe, masks the prosperity of the company's aerospace and auto businesses and was behind the aluminum company's announcement in late September that it would spin off its more profitable and diverse parts-making units. The deal is expected to close in the second half of next year, with Alcoa shareholders owning all outstanding shares of both companies.

The raw metals business, hurt by falling aluminum prices, will include the company's bauxite-mining, alumina-refining and aluminum-production businesses and will still be called Alcoa to reflect the company's heritage as the world's first industrial producer of aluminum.

The other entity, which for now Alcoa is calling its "value-add company, " will comprise its global rolled products, engineered products and solutions, and transportation-and-construction businesses. The Alcoa entities "now each have the strength and scale to each stand on their own," Mr. Kieinfeld said when the split was detailed.

Mr. Kleinfeld, a former chief executive at Siemens AG, has shut down Alcoa's unprofitable raw aluminum smelters while expanding its manufactured parts business, including through deals. Last year, it bought U.K. jet-engine parts maker Firth Rixson Ltd., and this year Pittsburgh-based RTI International Metals Inc., one of the world's biggest makers of fabricated titanium products for the aerospace industry.

More changes could be in store as Elliott gets more involved. Although the hedge fund's representatives have shied away from issuing orders, they are eager to have a "conversation" with Alcoa about improving the company's profit margins, according to people familiar with the matter.

Alcoa's spinoff will compete with Portland-based Precision Castparts Corp., which Warren Buffett's Berkshire Hathaway Inc. bought in August for $37.2 billion, including debt, Buffett's biggest acquisition yet.

In the third quarter, Alcoa posted a profit of $44 million, or 2 cents a share, down from $149 million, or 12 cents a share, a year earlier. Revenue fell 11% to $5.57 billion.

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November 23, 2015 14:59 ET (19:59 GMT)

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