Apollo to buy Arconic: what’s the deal of the year for the aluminium industry?
Investment fund Apollo Global Management ("Apollo") is to acquire US semi-finished aluminium goods producer Arconic for $5.2bn. After BHP Group's recent $6.6 billion acquisition of OZ Minerals, the deal could be the second largest in the world's non-ferrous metals industry this year.
There is nothing unusual about it in principle: Apollo has been acquiring shares in promising companies since its inception and then overselling them. And it is clearly not a newcomer to the aluminium business - over the years it has bought large stakes in primary aluminium and aluminium-based products from Xstrata, Rio Tinto and Mitsubishi Materials.
But there is another interesting thing. After India's Hindalco Industries acquired Canada's Novelis in 2007 for $6 billion and the US-based Aleris in 2020 for $2.8 billion, Arconic's takeover by Apollo would be the biggest deal in the global aluminium industry in the past three years.
Arconic itself has an unusual fate: in 2016 it was spun off from US-based Alcoa, now the world's oldest aluminium company. Alcoa kept its primary aluminium production plants, while Arconic's rolling mills, including Arconic SMZ (formerly Samara Metallurgical Plant), were incorporated.
Last year, however, it was sold to Industrial Investments for $230m, after which Arconic announced a Q4 2022 loss of $304m. In fact, the deal resembled a disguised escape from Russia: having such a strategically important enterprise as Arconic SMZ in the hands of an American corporation was nonsense against the background of sanctions adopted by the United States against Russia.
And there were questions about Arconic's activities in our country from its customers and from government authorities. It is not a coincidence that after the deal Arconic SMZ was returned to its historical name - Samara Metallurgical Plant.
Since the beginning of 2023, however, Arconic's financial situation has improved; at least it made a net profit of $25 million in the first quarter. Although, it is lower than the same period in 2022, which amounted to $42m.
The Arconic reported lower revenues from aluminium flat products, which is a worrying signal: they account for the lion's share of revenues and Arconic certainly can't make much money on sales of aluminium profiles and structural shapes.
The expected value of the deal with Apollo, on the other hand, is inferior to that planned in 2019, when negotiations for it first started - then estimated at $10bn. Consequently, Arconic has eroded its value to Apollo over the past four years and it will acquire the company at a decent discount. At the same time, Apollo is offering Arconic's shareholders $30 per security; in 2019, the talk was about $21-22.
If the global market for aluminium semi-finished products deteriorates, Arconic will become unprofitable again and it is unlikely that Apollo will be able to help it much - a lot here depends on demand, which is not yet on the verge of a strong expansion. At most, Arconic can count on financial support from Apollo, but it is unlikely to be significant.
Arconic's stock price has already reacted to the deal, jumping from $22.55 to $29.06 per share on the New York Stock Exchange. However, if Apollo buys Arconic with the necessary regulatory approvals, it will delist its shares.
