When you want to change a company from one where you are at the mercy of a commodity to one where you are in charge of your own destiny, you have to do exactly what Alcoa (AA) Chairman and CEO Klaus Kleinfeld is doing with the acquisition announced today of RTI International Metals (RTI) for a gigantic premium to where the company was selling just last week.
I know it probably seems extreme to launch a bid that sends any company up 40% -- one that makes everyone sit up and say "did Alcoa overpay?" -- but this acquisition brings Alcoa more and more to being a proprietary metals company, one that is levered to one of the biggest themes out there, the multiple-year cycle for aerospace. Airplane makers use tons of aluminum and titanium when they build planes and Alcoa's going to have a gigantic share of each plane, much higher than it had just a year ago because it had already made another acquisition at the end of last year, Firth Rixson, which increased the portion of Alcoa that sells into aerospace. Firth Rixson gives Alcoa a chunk of the materials in jet engines. RTI gives the company a healthy portion of the composite business that is integral to the Dreamliner and Alcoa already had a huge fastener business (2 million screws go into a plane) and a large portion of the skin of some planes through its aluminum-lithium alloy business.
Overlooked in all of this merger news is that Alcoa also is reviewing the closing of some more high-cost smelters that will move the company further down the cost curve that it was so high on before Kleinfeld took over.
When you look at the panoply of Alcoa's businesses you see that this is a company that will begin to get an expanded price-to-earnings multiple because it is no longer hostage to the whims of a metal that has been chronically in oversupply.
Don't forget that Alcoa already had strong businesses in non-residential construction, turbines, cans and trucks, including tire rims, as well as the lightweight aluminum that is displacing steel in the best-selling F-150 Ford (F) truck.
Altogether, you can see how this is a different Alcoa. But because the company is using stock to buy RTI and is paying so much vs. where the company traded Friday you know it is very difficult for the stock to rally.
There are two other concerns that will make this deal palatable in the eyes of those who think Alcoa paid too much.
- RTI is a ready source of titanium at a time when Russia could cut off its supply. Russia's the biggest producer of titanium and many were worried recently that the aerospace concerns could be held hostage to the sanctions being put on against Putin's Russia. RTI uses Japanese titanium sponge and that will allow it to become the go-to supplier if sanctions get ratcheted up, which is certainly a likely possibility.
- RTI has a 3D printing business buried within the company that could offer a very competitive machine to those from 3D Systems (DDD), Stratasys (SSYS), Voxeljet (VJET) and even HP, the spinoff of Hewlett-Packard (HPQ), which is the most likely leader in 3D printing beginning 2016 when its machines will ship in volume.
I think that the new Alcoa won't surface until later this year after the integration of Firth Rixson and now RTI Metals. There's way too many moving parts. But the good news is that for those who want to get in, Alcoa has now given up all of its gains after that last better-than-expected quarter and then some, creating an attractive opportunity as the arbitrageurs lock in their positions to profit from the closing of the deal spread over time.