Alcoa Inc. shares rallied after billionaire Paul Singer’s Elliott Management Corp. announced it bought a stake in the largest U.S. aluminum producer and was seeking “constructive dialogue.”
Elliott disclosed a 6.4 percent shareholding in a filing released Monday, saying Alcoa Chief Executive Officer Klaus Kleinfeld’s plan to split the New York-based company in two would create value. CNBC earlier reported the purchase, which Alcoa also confirmed.
Alcoa jumped 5.2 percent to $9.14 at 12:02 p.m. in New York, the best performance among members of the Bloomberg Americas Mining Index, which fell 0.3 percent amid a deepening collapse in commodity prices. Alcoa shares have dropped more than 40 percent this year.
“It’s obviously a vote of confidence from a firm that is steeped in strategic actions,” Josh Sullivan, an analyst at Sterne Agee CRT, said by telephone.
Alcoa plans to separate its metal-making business from manufacturing and is stepping up efforts to close higher-cost smelting and refining capacity as a global glut batters the price of the metal. Alcoa has seen increasing revenue and profitability from its segments that produce aluminum products for construction, aerospace and automotive customers. The company has spent $3.5 billion in the past two years buying companies to bolster its manufacturing capabilities.
The price of commodity aluminum tumbled to a six-year low as increasing output and declining consumption in China, the biggest user, has swelled a global oversupply. Alcoa said this month it will cut 503,000 metric tons of smelting capacity by the end of next quarter. When the curtailments are complete, Alcoa will have shut, halted or divested 45 percent of the metal producing capacity it had in 2007.
While Elliott said it supports Alcoa’s separation plan, the fund may encourage the metal company to more aggressively sell or restructure its global power assets, which no longer fuel smelters the company has shut down, Sullivan said.
Elliott has traditionally been an activist investor seeking changes at major companies including Hess Corp. and Samsung Group. The Alcoa stake is the fund’s 10th campaign this year, and its first involvement in a materials company, according to data compiled by Bloomberg. Since 2010, Elliott has been involved in 16 technology companies. The average share performance for Elliott’s nine other campaigns this year has been 8.2 percent.
“The domino left to fall is the power-generation units,” Sullivan said. “They can sell those, they have value and they’re not connected to production.”
Elliott built up the stake on the assumption that the market was undervaluing Alcoa’s manufacturing business because of the metal price rout, according to people familiar with the transaction, who asked not to be identified discussing non- public information. Elliott also sees potential to unlock value from Alcoa’s power plants, said the people.
“The spin-off transaction recently announced by management will create value substantially above the current share price,” the hedge fund said in a filing Monday. The fund will “seek to engage in a constructive dialogue” with the board “regarding this transaction as well as a number of other additional available opportunities to maximize shareholder value.”
“Elliott advised us of their ownership of AA shares several weeks ago, shortly after we announced the separation of our Upstream and Value-Add businesses,” Alcoa spokeswoman Monica Orbe said in an e-mail. “Since then we have had constructive discussions with Elliott.”
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