Aluminum group Alcoa Inc (AA) announced on Thursday a $2.85 billion deal to buy a company that makes jet engine parts, largely out of nickel-based alloys and titanium. The Pittsburgh-based aluminum company said Thursday it would buy Firth Rixson Ltd. from private-equity firm Oak Hill Capital Partners LP for $2.35 billion in cash and $500 million in common shares. Alcoa agreed to pay as much as an additional $150 million, depending on the Sheffield, England, manufacturer's performance through 2020.
The company has operations all over the world and engages primarily in mining bauxite, refining it into alumina and manufacturing complex metal goods such as aircraft fuselages and truck wheels. As massive oversupply weighs on the price of less-processed aluminum, the company has been pushing to expand its higher-margin aerospace and automotive businesses. A global glut in capacity has pushed down aluminum prices in recent years, hurting Alcoa's earnings. Goldman, Sachs & Co. also welcomed the deal. "We see this proposed acquisition as potentially transformational for Alcoa, giving it the capability to become a major player in the aerospace jet-engine market," it said in a press release.
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With roots in the 19th century steel industry of Sheffield, England, Firth Rixson has operations in the United Kingdom, United States, continental Europe and China. While aerospace is the biggest part of its business, it also has power generation, oil and gas, and mining segments. It expects the takeover to raise its aerospace revenue by 20 percent, to some $4.8 billion a year. It sees no impact on earnings in the first year, and gains in the second year. The deal value includes $2.35 billion in cash and $500 million of stock. There may also be a payment of as much as $150 million based on Firth Rixson's performance. Alcoa's financial advisers were Greenhill & Co and Morgan Stanley, and its legal adviser was Wachtell, Lipton, Rosen & Katz. Firth Rixson was advised by Citigroup Inc and Lazard Ltd, as well as law firm Paul, Weiss, Rifkind, Wharton & Garrison. Alcoa also said in a press release that it had received senior debt and mezzanine financing from Morgan Stanley.
Alcoa’s shares rose 39 cents to 2.7% at $14.94 on Thursday on NYSE. This comes after the company was ousted from the Dow Jones International Average in September. Alcoa projected 7% annual growth in the market for commercial jets through 2019. Firth Rixson sales are forecast to rise more than 12% a year through that period with most of its revenue coming from the sale of its aerospace products. The company is projected to add $1.6 billion in revenue and $350 million in earnings before interest, taxes, depreciation and amortization in 2016, Alcoa said. The Firth Rixson purchase, which is expected to be completed by year-end, would accelerate Alcoa's growth in engineered products, Morningstar's Mr. Lane said. Oak Hill bought Firth Rixson in 2007 for the equivalent of about $2 billion from a group of investment funds. The deal might prove to be beneficial as it shows some hope for better returns on investment.