Photographer: Daniel Acker/Bloomberg

Elliott Confirms Alcoa Stake, Supports Plans to Split Company

  • Fund discloses 6.4 percent stake in aluminum producer
  • Elliott says it seeks `constructive dialogue' with Alcoa

Normally when an activist investor shows up on a shareholder register it comes with a set of ultimatums. Not with Alcoa Inc., where the arrival of Paul Singer’s Elliott Management Corp. was seen as an endorsement.

Alcoa was the best performer among major metal and mining shares on Monday as Elliott disclosed a 6.4 percent shareholding, saying Chief Executive Officer Klaus Kleinfeld’s plan to split the company in two would “create value substantially above the current share price.”

Elliott, which has sought changes at major companies including Hess Corp. and Samsung Group, built up the Alcoa stake on the assumption that the market was undervaluing its manufacturing business because of the metal price rout, according to people familiar with the transaction, who asked not to be identified discussing non-public information.

“It’s obviously a vote of confidence from a firm that is steeped in strategic actions,” Josh Sullivan, an analyst at Sterne Agee CRT, said by telephone.

Alcoa plans to separate its metal-making business from manufacturing and is stepping up efforts to close higher-cost smelting and refining capacity as a global glut batters the price of the metal. After spending $3.5 billion in the past two years buying companies to bolster its manufacturing capabilities, it’s seeing increasing profitability from segments that produce products for construction, aerospace and automotive customers.

‘Constructive Dialogue’

While Alcoa said Elliott advised it of the stake shortly after the separation announcement, Elliott said in Monday’s filing that it’s seeking “constructive dialogue” with the New York-based producer’s board “regarding this transaction as well as a number of other additional available opportunities to maximize shareholder value.”

“In terms of making Alcoa do what they would not have done otherwise, the major actions are already going on,” Lloyd O’Carroll, a Richmond, Virginia-based analyst at CRU Group, said in a telephone interview Monday. “Separating the commodities from the engineered products is already going on.”

The fund may encourage Alcoa to more aggressively sell or restructure its global power assets, which no longer fuel smelters the company has shut down, Sullivan of Sterne Agee CRT said.

“The domino left to fall is the power-generation units,” Sullivan said. “They can sell those, they have value and they’re not connected to production.” 

10th Campaign

The Alcoa stake is Elliott’s 10th campaign this year, and its first involvement in a materials company, according to data compiled by Bloomberg. Since 2010, Elliott has been involved in 16 technology companies. The average share performance for Elliott’s nine other campaigns this year has been 8.2 percent.

Alcoa shares jumped 4.4 percent to $9.07, the best performance among members of the Bloomberg Americas Mining Index, which slumped 1.5 percent amid a deepening collapse in commodity prices. Alcoa shares have dropped more than 40 percent this year.

The price of aluminum tumbled to a six-year low as increasing output and declining consumption in China, the biggest user, has swelled a global oversupply. Alcoa said this month it will cut 503,000 metric tons of smelting capacity by the end of next quarter. When the curtailments are complete, Alcoa will have shut, halted or divested 45 percent of the metal-producing capacity it had in 2007.

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