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Could Alcan become a publicly traded company again? Five years after Rio Tinto plc foolishly paid more than $38-billion (U.S.) for the Montreal-based aluminum giant, Citi Research analyst Heath Jansen has made a compelling case why Rio should spin off its aluminum assets. There's good logic to his arguments, but nostalgic investors should be warned: if Alcan does again become a stand-alone entity, it will be a shadow of Alcan from its glory days. A lot has changed, both within the company and across the industry.
Alcan went from the shining star of the metals and mining business to the industry's cautionary tale, the asset that was sold at the very top of the cycle for a vastly inflated price. It cost Rio CEO Tom Albanese his job and the company wrote down about 80 per cent of its value, as the aluminum division's earnings dropped from $1.18-billion in 2008 to just $3-million last year. Investors now assign "little if any value for the aluminum assets," Mr. Jansen writes.
But of course the old Alcan business is worth something – $13-billion in enterprise value, by Mr. Jansen's calculations – so by spinning off the business and also deferring a multi-billion-dollar capacity expansion in its core iron ore business, Rio could unleash huge shareholder value, the analyst argues. With a new CEO, Sam Walsh, weighing his options to restore Rio's reputation, expect the idea to merit serious consideration.
So, if Alcan were to go public, what would investors get? For one, a smaller, less diversified company than they remember. Alcan's diversification used to be one of its strong suits. Since the takeover, however, Rio has sold off Alcan's packaging, engineered products and cable businesses and shuttered some smelters. Unfortunately for Alcan, its former "downstream" businesses, including its rolled aluminum operation (a key supplier to the pop business, which was divested in the pre-Rio days) have seen an improvement in their fortunes, while the "upstream" primary aluminum manufacturing businesses that it retains have suffered.
The big problem is overcapacity and weak pricing. Aluminum sold for between $2,500 and $3,000 per metric ton in the period before the credit crisis. Those days are long gone; the metal now sells for less than $1,900 and prices aren't expected to show much life for a few years until supply and demand balance out.
But something else has been lost. Alcan was overseen by a top-tier board and a crack management team with depth not just in operations but also mergers and acquisitions and capital markets. That team is now mostly gone, with the exception of former primary metals boss Jacynthe Cote, who runs Rio's aluminum business. Alcan is now an operating subsidiary, so to make the company ready for public markets, a lot of rebuilding would need to take place at the senior levels.
Even with the right group in place, investors would have to appreciate that the new Alcan wouldn't be turning the clock back by six years, but by much farther than that, at least 15 years, to a time before its landmark Alusuisse and Pechiney acquisitions. The good news is that its core assets – large scale, low-cost operations in Quebec and Australia – would provide a solid platform for growth, assuming that management can retain the discipline that marked Alcan's style for years. But it took decades to make Alcan the force it was before it sold out, and it could take decades more to get there again.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.