) made another big push into the fast-growing aerospace market as
it has agreed to buy U.K.-based leading jet engine components maker
Firth Rixson from private equity firm Oak Hill Capital Partners in
a cash and stock deal worth $2.85 billion. The aluminum giant's
shares screamed higher to touch a new high following the
The move represents a significant milestone in Alcoa's portfolio
transformation strategy as it gradually shifts its focus on
lucrative aerospace and automotive markets. It is in sync with the
company's goal to profitably grow its aerospace franchise and build
its value-added businesses.
Alcoa, which continues to grapple with weak aluminum pricing, is
increasingly focused on broadening its foothold in the aerospace
market as it looks for expansion opportunities beyond its legacy
primary aluminum business and diversify into other materials such
as those (nickel and titanium-based) used to make aircraft parts.
Aluminum prices, which remain weak given the oversupply of the
metal in the market, continue to weigh on its bottom line.
Alcoa, which was ousted from the Dow Jones Industrial Average
last year partly due to its tepid stock performance, saw its shares
shot up as much as 4.3% to reach a new 52-week high of $15.18
yesterday. The stock retraced to end the day at $14.94, gaining
around 2.7%. Alcoa's shares have racked up a healthy 41% gain so
far this year, bringing back cheer to investors.
A $2.85 Billion Aerospace Bet
Under the deal terms, Alcoa will buy Firth Rixson for $2.35
billion in cash and $500 million of its stock and an additional
$150 million for specific earnings-related milestones. The buyout
will be backed by a fully committed bridge facility from
). Greenhill and Morgan Stanley served as financial advisors to
Alcoa on the deal while
) acted as financial advisors to Firth Rixson.
The deal has been approved by the boards of both companies and
is subject to regulatory clearances and other closing conditions.
Alcoa expects to secure the required regulatory approvals and wrap
up the transaction by end-2014.
The acquisition of Firth Rixson it a strategic fit for Alcoa as
it complements the latter's goal to strengthen its global aerospace
portfolio. Firth Rixson is currently the global number one in
seamless rolled jet engine rings that are engineered from
nickel-based superalloys and titanium, and is a leading supplier of
jet engine forgings. This will boost Alcoa's foothold in global
aerospace engine forgings.
Moreover, Alcoa, through this acquisition, will penetrate into a
highly specialized segment of jet engine forgings that need
isothermal forging technology. Isothermally forged components are
increasingly needed in jet engines that utilize higher turbine
temperatures to beef up power output, boost fuel efficiency and cut
Strong aerospace build rates are expected to triple the demand
for large isothermal aerospace engine disks in the next eight
years. Firth Rixson, which derived roughly 75% of its sales from
the aerospace industry last year, recently entered this market
segment through the development of its state-of-the art facility in
A Compelling Prospect
The buyout brings in considerable benefits to Alcoa. It
reinforces the company's aerospace business and strongly places it
to capture additional growth in this growing market through a broad
spectrum of high-growth, value-add jet engine components. The
acquisition will expand the market reach of the company's aerospace
Firth Rixson's sales are expected rise 12% annually through
2019, a rate more than double the global aerospace market. Its
revenues have been forecast to increase 60% over the next 3 years
to $1.6 billion from $1 billion in 2013. The acquisition will also
contribute $350 million EBITDA by 2016.
The acquisition is expected to expand Alcoa's annual aerospace
revenues by 20% to $4.8 billion from $4 billion in 2013 on a pro
forma basis and increase the contribution of the high-growth
aerospace segment to the company's value-add revenues to around 35%
Alcoa is also expected to realize significant cost synergy from
the transaction with cost savings reaching over $100 million by the
fifth year. The acquisition is expected to be neutral to its
earnings in the first year and accretive afterwards.
Leveraging Strong Momentum in Commercial Jet
Alcoa, a Zacks Rank #3 (Hold) stock, makes lightweight metallic
solutions for the aerospace industry. It holds leading market
positions in aerospace forgings, extrusions, jet engine airfoils
and fastening systems made by its downstream business, and
aerospace sheet and plate made by its midstream business. The
company's aerospace business was the biggest contributor to its
value-add businesses last year, accounting for 57% of overall sales
and 80% of segment profits.
Alcoa, in Apr 2014, bumped up its global aerospace growth
expectations for 2014 to 8%-9% from 7%-8% factoring in strong
demand for both large commercial aircraft and regional jets and
sustained growth in the business jet market.
Alcoa recently said that it is investing $25 million to boost
capacity at its power and propulsion facility in Hampton, VA, to
address increasing demand for next-generation aircraft engine
parts. The company, last month, broke ground on its new $100
million aerospace expansion in La Porte, IN, where it will produce
nickel-based superalloy jet engine parts for large commercial
aircraft, including narrow and wide-body and military
With the Firth Rixson takeover, Alcoa will be able to capitalize
on strong growth in the commercial aerospace segment. The company
envisions the commercial jet sector to grow at a compounded annual
rate of 7% through 2019. Given this healthy prospect, Alcoa is
undoubtedly moving in the right direction.
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