Aerospace Takes Center Stage For Alcoa With Firth Rixson Acquisition
Alcoa (NYSE:AA) has announced the signing of a definitive agreement to acquire Firth Rixson, a leading jet engine components manufacturer, from Oak Hill Capital Partners. The total consideration for the acquisition is $2.85 billion, consisting of $2.35 billion in cash and $500 million in stock. [1] In addition, there is a potential $150 million earn-out, the payment of which depends on Firth Rixson’s performance through 2020. [2]
The acquisition is the latest in Alcoa’s strategic shift towards value-added products, with an emphasis on the aerospace segment. The company is shifting towards value-added products to reduce its dependence on aluminum, which has a weak pricing environment due to an oversupply situation.
See our complete analysis for Alcoa
Benefits Of The Acquisition
The acquisition of Firth Rixson will widen Alcoa’s jet engine components portfolio. Firth Rixson is the world’s number one supplier of jet engine rings, engineered from nickel-based superalloys and titanium. Firth Rixson also manufactures isothermal forgings, and with this acquisition, Alcoa will expand into the full range of global aerospace engine forgings. ((Alcoa’s Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release))
The acquisition is a significant boost to Alcoa’s aerospace revenues. It grows Alcoa’s aerospace revenues in 2013 by 20% on a pro forma basis, from $4 billion to $4.8 billion. Firth Rixson’s revenues are expected to grow approximately 17% annually over a three year period, from $ 1 billion in 2013 to $1.6 billion in 2016, and it is expected to report Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) of $350 million in 2016. ((Alcoa’s Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release)) Over the longer-term, Firth Rixson’s revenues are expected to grow at 12% annually through 2019, which is around twice the annual rate of growth of the global aerospace market at 5-6% over the same period. 70% of Firth Rixson’s growth is secured by long-term agreements. [2]
The acquisition will also result in significant cost synergies, primarily driven by purchasing and productivity improvements, optimizing internal metal supply, and leveraging Alcoa’s global shared services. Cost savings are expected to exceed $100 million annually by the fifth year after completion of the acquisition. ((Alcoa’s Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release))
Shift To Value-Added Products
Aluminum prices have fallen due to an oversupply situation, with reductions in global production capacity being far lesser than the decline in demand, driven by a slowdown in Chinese demand. [3] The average realized price per ton of aluminum for Alcoa has fallen from $2,636 in 2011 to $2,243 in 2013. ((Alcoa’s 2013 10-K, SEC))
Low aluminum prices have negatively affected Alcoa’s upstream businesses. The company has reduced its smelting capacity, in response to the adverse pricing environment. As a result of these steps, Alcoa’s base smelting capacity has reduced from 4.227 million tons at the end of 2012, to 3.953 million tons at the end of Q1 2014. Further, the company had 675,000 tons of idle capacity, out of its base smelting capacity of 3.953 million tons. ((Alcoa’s Q1 2014 10-Q, SEC))
In order to reduce its dependence on aluminum prices, the company has made concerted efforts to rebalance its portfolio towards value-added products. The value -added products have pricing premiums over the company’s upstream products, namely primary aluminum and alumina, and command higher margins. Alcoa’s strategic shift towards value-added products is reflected in its revenue figures. The percentage contribution of value-added products to total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7% and 57.2% at the end of 2011, 2012, 2013 and Q1 2014 respectively. [4] In calculating these figures, we have only considered third party sales. The company’s value-added products accounted for 76% of its total segment after-tax operating income. ((Alcoa Boosting Aerospace Capabilities in Virginia to Meet Demand for Next-Gen Aircraft Engine Parts, Alcoa News Release))
Focus On Aerospace
Alcoa is betting big on its aerospace customers to drive sales of its value-added products. In the aerospace segment, Alcoa has raised its forecast for growth in production from 8% to 9% for 2014. The company expects strong performance from its large commercial aircraft and regional aircraft segments. The combined backlog of 10,675 aircraft units for Boeing and Airbus represents eight years worth of production. For Alcoa, this represents sustained demand for its aerospace products for the medium term. [5]
The company forecasts a 7.1% compounded annual growth rate (CAGR) for commercial jet deliveries and a 7.3% CAGR for jet engine deliveries till 2019. It hopes to capitalize on this growth. Hence, it has increased its exposure to the aerospace segment. ((Accelerating Alcoa’s Transformation, Alcoa Company Presentation))
In 2014 alone, several major developments in the aerospace segment have taken place for Alcoa. It recently announced the $25 million expansion of the Alcoa Power and Propulsion facility, located in Hampton, Virginia. ((Alcoa Boosting Aerospace Capabilities in Virginia to Meet Demand for Next-Gen Aircraft Engine Parts, Alcoa News Release)) The company had earlier announced the setting up of a $100 million facility in La Porte, Indiana for the production of nickel-based superalloy jet engine parts. ((Alcoa Expands in Indiana to Capture Growing Aerospace Demand for Advanced Jet Engine Parts, Alcoa News Release)) Alcoa also signed a long-term agreement worth $290 million to supply aluminum sheet to Spirit AeroSystems over five years. Spirit is one of the largest designers and manufacturers of aerostructures for commercial, military, business and regional jets in the world. [6]
Alcoa’s aerospace revenue of $4 billion in 2013, accounted for around 17% of its total revenue for the year. ((Alcoa’s 2013 10-K, SEC)) With several recent developments in the aerospace segment, its share of the company’s revenue is set to grow. Thus the road ahead for Alcoa is clear- a continuing shift towards value-added products, driven by the aerospace segment.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology
Notes:
- Alcoa’s Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release [↩]
- Accelerating Alcoa’s Transformation, Alcoa Company Presentation [↩] [↩]
- Alcoa, Rusal’s Aluminum Production Cuts Not Enough With China Smelting, Metal Miner [↩]
- Alcoa’s 2013 10-K, SEC [↩]
- Alcoa’s Q1 2014 Earning Conference Call Transcript, Seeking Alpha [↩]
- Alcoa Signs Long-Term Supply Agreement With Spirit AeroSystems For Aluminum Sheet, Alcoa News Release [↩]