Alcoa (AA) is 5% higher this morning on news that the aluminum company will split its smelting and downstream businesses into two publicly traded entities sometime next year. The company aims to get an investment-grade rating on both businesses.
The smelting business has been a major drag on the downstream business, which is a major player in the high-value aerospace area as well as a key player in the automotive sector. The company's recent joint venture with Ford (F) to increase the light aluminum in the F-150 pickup truck is starting to pay dividends.
The separation will also give Alcoa's downstream business more flexibility in negotiating with potential behemoths such as Anheuser-Busch InBev (BUD) and SABMIller. That said, it is very difficult to make an attractive case for shareholders to hang onto the smelting business. The growth in Chinese exports and cheaper Middle East production makes the smelting business uneconomic.
The final nail in convincing CEO Klaus Kleinfeld to engineer this deal was the collapse of global premiums, which were inflated for much of the past 18 months until trading firms like Glencore (GLCNF) had to liquidate metal being financed off the market.
I would stay away from the smelting business (I think the company will try to sell it to one of the Middle East companies) and invest in the downstream business as long as the global economy does not dip into recession when the split takes place.
Ben Cross is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders.