Alcoa: Wrapping Up Its Consumer Biz?

The aluminum giant says it's cosnidering selling the unit that makes Reynolds foil along with other assets as it streamlines operations

Alcoa (AA) said Apr. 25 that it's considering the sale of giant business units including the packaging one that makes Reynolds Wrap. The Pittsburgh aluminum producer, which continues streamlining operations even as its rivals join forces, expects to complete its evaluation by the end of 2007.

The company is exploring strategic alternatives for its consumer and packaging businesses, which make materials ranging from aluminum foil to beverage caps to plastic bags. The segment consists of 10,000 employees in 22 countries who generated around $3.2 billion in revenues in 2006, or 10% of the company's total revenue. Alain Belda said in a press release Apr. 25 that "now is the right time for us to explore whether these businesses may provide more value on their own or as part of another company."

Alcoa is also considering strategic alternatives involving its electrical unit, which was formerly the AFL wireharness business, and automotive castings businesses. Those businesses had combined 2006 revenues of around $1.6 billion.

After the news investors bid up Alcoa's stock 5.3% to $35.75 per share on the New York Stock Exchange.

"The group, which includes the Reynolds line of products and caps for soft-drink bottles, was never a complete fit for the company, and we think disposing of it in this hot mergers and acquisitions market is a good strategy for Alcoa," Morningstar analyst Scott Burns said in a note. "This move will certainly position Alcoa ever closer to being a pure-play aluminum company."

It's not the first such effort Alcoa has made recently to streamline its sprawling business. After taking criticism from investors for its costs, Alcoa in late November had announced plans to slash about 10% of its 129,000 workforce. The company has also taken recent steps like honing down some of its operations in the troubled automotive sector, selling its soft-alloys business to a new venture, closing its AFL Seixal manufacturing plant in Portugal and restructuring other operations in the U.S. and Mexico.

"We believe that AA will benefit from ongoing consolidation of the aluminum industry," Standard & Poor's equity analyst Leo Larkin said in a note Feb. 14. (S&P, like, is owned by The McGraw-Hill Companies.)

Led mostly by Alcoa and its rival Alcan, consolidation of the industry had accelerated in the late 1990s and thereafter, S&P says. As a result, the industry has become more concentrated, with Alcoa, Alcan and Russian Aluminum (Rusal) accounting for some 41.4% of primary aluminum production in 2005. Meanwhile the Russian aluminum producers Rusal and Sual Group merged in March with the Swiss commodity trading company Glencore International, creating the world's largest aluminum producer, United Company RUSAL.

As rivals join forces in the global market, it looks like Alcoa is girding itself for a brusing battle.

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