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Alcoa Shares Rise on Restructuring Plans by Laura Mandaro MarketWatch, November 22, 2006

SAN FRANCISCO -- Alcoa Inc. shares climbed Wednesday, a day after it announced a broad restructuring program that would cut 5% of its workforce and lead to a spin-off of its molded soft-alloy business via a joint venture with Norway's Orkla ASA.

"It is a positive move, in our view, which will increase the average returns of the business," said ABN AMRO analyst Rob Clifford in a note to investors.

Shares of the Dow-30 component rose 2.4% in the first 20 minutes of trading Wednesday, outpacing the Dow Jones Industrial Average's 0.2% climb.

The world's biggest aluminum company said late Tuesday that it would close plants and consolidate operations across five divisions in the U.S. and overseas, as it seeks to increase its profitability. See full story.

The restructuring will eliminate 6,700 Alcoa jobs over the next 12 months, with bulk of those in units that make parts for the auto industry.

The downsizing aims to save the Dow 30 company $125 million pre-tax a year, it said. At the same time, the world's biggest aluminum company will wind down its presence in soft-alloy extrusion - which makes a wide variety of engineered aluminum products like window frames - through a joint venture with a unit of Norwegian industrial conglomerate Orkla

Alcoa said it has signed a letter of intent with Orkla's Sapa Group to create a joint venture that would combine its soft-alloy extrusion business with Sapa's molded aluminum parts business, with the intention of eventually offering an IPO of the combined entity.

The new venture will be majority-owned by Orkla and operated by Sapa. It should be formed by the end of the first quarter pending government approvals.

The moves will force Alcoa to take after-tax charges of $375 million to $425 million in its fourth-quarter earnings, about half of it related to its exit from the soft-alloy extrusion business. That business generated sales for Alcoa of $2.1 billion in 2005, or about 8% of the company's overall revenue.

But the soft-alloy business has lagged its other divisions, particularly the "upstream" alumina, bauxite and aluminum smelting operations, and executives had said they were looking for strategic alternatives for the business.

"It appears that Alcoa has decided that it cannot improve the performance of some of its assets, so is moving to divest or shut them," said Clifford.

He estimates operating margins on Alcoa's extruded and end-products, which include the soft-alloy business, will be 1% this year, paling beside the 20% to 30% margins generating from alumina and primary metals divisions.

"We have a very strong downstream operation - the laggard was the soft-alloy business," said spokesman Kevin Lowery.

Alcoa's soft alloy division operates out of 22 facilities in eight countries and employs about 6,400 people. Those employees will continue to work at the joint venture, Lowery said.

Separately, Alcoa will begin the process of divesting the three soft alloy facilities not included in the joint venture. Those facilities are in Warren, Ohio; Tifton, Ga., and Plant City, Fla., it said.

It will continue to operate its hard alloy extrusion business, which makes parts for aerospace, automotive, and other markets.