In this frenzy of a stock market cycle, there are two corporate break-ups that are likely to occur in 2016 that investors ought to keep an eye out for. The current market environment or the state of the economy is likely not a factor in these corporate splits. Each split is likely to create separate businesses that are worth more in the aggregate than the current parent is worth today.
Thus, investors have an opportunity to invest in an corporate transaction that is agnostic to market performance. Today I will go over one of the two. I will reveal the second opportunity at a later date.
The first split is aluminum giant Alcoa (AA), which will be spinning off its value-added aluminum business from its commodity production business. The current stock price of Alcoa -- around $8 a share -- appears to be significantly less than the values of the two separate entities that will be created. The value-added business produces specialty aluminum parts for the automobile and aerospace industries, two markets that are doing well today.
Berkshire Hathaway's (BRK.A; BRK.B) recent $30 billion acquisition of Precision Cast Parts, a maker of specialty aerospace components, was done at over 20x earnings. If Alcoa's spin-off is valued favorably, it could be worth nearly $8 a share.
The value-added specialty aluminum business currently generates over $2 billion in EBITDA. Today, Alcoa trades for 5x EV to EBITDA. Alone, the value-added business should have a higher valuation due to its quality growth profile. At 7-9x, the total value is around $14 to $18 billion.
The commodity business generates $2.8 billion in annual EBITDA, and if you give it a 4x multiple, you get nearly $12 billion in total value. The two separate companies would have a total value of nearly $26 to $30 billion, compared with a total enterprise value of $17.5 billion today.
In summary, Alcoa's current $8 share price is likely going to create two separate entities with a total stock price of $12 or higher, or a 50% gain from today's level.
Alcoa intends to split the company during the second half of 2016. Even against the market volatility and economic uncertainty, the resulting two businesses are likely to create better visibility into the true value of Alcoa.