Aluminium giant Alcoa is nearing its spin-off scheduled for the second half of 2016. The strategic decision of the company has been received well by its investors ever since it was announced last September. Shares of Alcoa have surged more than 14 per cent. However, there remain many regulatory hurdles that the company need to cross before it can effectuate the split.
The split will result in creation of a commodity-focussed business which will retain Alcoa's name and will include five upstream segments namely- Bauxite, Alumina, Aluminium, Cast Products and Energy (and a part of the Rolled Products business); and a value-added focussed company called Arconic. It will operate segments such as Transportation, Construction Solutions, Engineered Products and Solutions and Global Rolled Products.
The spin-off will enable Alcoa to focus separately on the two business segments and help each to attain its own long-term objectives and financial stability.
Industry experts, though second Alcoa's rationale behind spinning off of its businesses, hold the opinion that post parting, Alcoa, the commodity business, will become more vulnerable to aluminium price volatility. Arconic, on the other hand, they believe, will remain far less exposed to the metal's market dynamics. The upstream business will be left at the mercy of a number of other influencing factors as well, which includes aluminium industry cyclicality and global economic uncertainty.
Although Alcoa does boasts a strong portfolio of bauxite and aluminium assets, its performance remains closely associated with commodity prices. This is clearly evident as the company posted a 10 per cent year-over-year (YoY) decline in Q2 2016 revenue “primarily due to lower aluminium and alumina pricing,” among other factors.
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