Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Arconic Inc. threw shareholders a bone and they ignored it.

The $13 billion metal-parts maker announced on Wednesday that it has sold more than half of its Alcoa Corp. stake, a holdover from the companies' November breakup. The divestiture will generate about $890 million in proceeds, which Arconic seemed to imply wouldn't be diluted by taxes, giving it a decent chunk of cash to put to work on share buybacks and debt reduction.

The market reaction? Shares of Arconic fell about 1 percent on Wednesday and nudged a little lower Thursday morning. That's not the way this is supposed to work.  

Mixed Messages
Both Arconic and Alcoa traded down after the stake sale announcement. You'd think Arconic would get a pop.
Source: Bloomberg
Intraday times are displayed in ET.

Arconic, under pressure from Elliott Management Corp. and other large holders over CEO Klaus Kleinfeld's cost-management shortcomings, had previously signaled it would do something with its Alcoa stake within 18 months after the breakup so this is a bit fast. Shareholders may wonder if the wind-down is an attempt to win their support. At the same time, Arconic has said it would base its decision on the stake on market conditions and it's hard to argue against taking advantage of a 70 percent-plus gain in Alcoa post-split. 

Whatever the company's intentions, you'd think this would be the kind of thing investors would applaud. Large stakes in other companies can become a strategic question mark and an overhang on stock prices. Just ask Abbott Laboratories, which is still the biggest shareholder in Mylan NV after a 2015 asset sale, or Novartis AG, whose years-old stake in rival Roche Holding AG has become a frequent source of speculation. Arconic will still be the second-largest holder of Alcoa shares after the sale, but it demonstrated a willingness to rip off the Band-Aid, while still leaving open an opportunity to capitalize on further gains in Alcoa's stock.

Meanwhile, stock buybacks are actually something that activist investors often push for as a way to boost the stock price, while debt reduction factors into Arconic's efforts to strengthen its balance sheet and improve its return on net assets. (The company would be wise to prioritize the latter considering the run-up in its stock in the wake of Elliott's calls for change.)

But Elliott has made very little fuss over capital allocation and is instead focused on concerns it has about Arconic's operations and costs. That seems to be what other shareholders are keyed in on as well, along with complaints about governance issues and a "culture of waste and underperformance", as First Pacific Advisors put it. In other words, thanks for the cash infusion but when are you going to get your margins up and do something with those New York headquarters?

Change Agent?
Analysts have increased their estimates for Arconic's profitability following Elliott's ramped-up criticism of the company
Source: Bloomberg

This may have been a justified and logical move by Kleinfeld, but it probably won't help him save his job.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The tax treatment of the sale has also raised questions; Arconic in its Wednesday press release mentioned the potential to use carryforward tax attributes to offset taxable income. But it had previously suggested it could get a tax benefit by exchanging that stake against debt.

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