Alcoa’s Investor Day: Klaus Kleinfeld on the New Structure

Alcoa: The Split and Key Takeaways from Investor Day

(Continued from Prior Part)

New structure

During Alcoa’s (AA) Investor Day on November 4, 2015, Klaus Kleinfeld, the company’s CEO (chief executive officer) and chairman, shared his thoughts on what Alcoa must consider before the company splits into two separate entities.

Considerations

• Alcoa must consider taxes. There can be a tax incidence involved when assets are split. According to Kleinfeld, in order to end up with an efficient tax structure, Alcoa will have to negotiate with the appropriate tax authorities. Minimizing the tax liability, if any, would be one of Alcoa’s foremost priorities in finalizing the new structure.

• Alcoa must also consider capital structure. The company is aiming for an investment-grade (BND) credit rating for its value-add company while maintaining a strong non-investment-grade rating for the upstream company. The credit ratings would depend to a large extent on how much debt is placed on the balance sheets of these companies.

• The company will also need to consider pension obligations. Alcoa has an underfunded pension funding of ~$3.3 billion as of December 31, 2014. The company will have to decide how to split the pension obligations between the two companies.

Together, Alcoa and Ball Corporation (BLL) form ~4% of the Materials Select Sector SPDR ETF (XLB). Sealed Air (SEE) forms 1.8% of XLB’s holdings.

Other issues

Kleinfeld also highlighted the following considerations before the final structure is rolled out: “What legal structure do you use? What exchange will the spun-out company be listed on? How are the assets and liabilities going to get allocated? And last but not least, other terms like transition service agreements and the distribution ratio.”

Alcoa plans to file Form-10 with the SEC (U.S. Securities and Exchange Commission) by the middle of 2016. According to Alcoa, this will provide information on the “Pro Forma financials, capital structure, allocation of liabilities, separation costs, and the governance profile.”

In the next part, we’ll see why choosing the correct structure will be crucial for Alcoa.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Alcoa’s Investor Day: What Investors Should Know

• Part 3 - What Factors Could Drive Alcoa’s Valuation after the Split?

• Part 4 - Investor Day: Alcoa’s Take on the Aluminum Industry’s Outlook