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Morningstar | Arconic Reportedly Mulls $11 Billion Acquisition Offer; Offer In Line With Our $23 FVE

Based on a Reuters report published the evening of Oct. 22, Arconic is considering an $11 billion acquisition offer from Apollo Global Management. The offer would value Arconic at between $23 and $24 per share, closely in line with our existing $23 per share fair value estimate. Our fair value estimate has been steady at $23 since the company's first-quarter earnings release in late April and has ranged between $23 and $25 per share since early 2017. This same time period has proved volatile for the stock, with share prices ranging between $17 and $31 per share. In light of this report, our fair value estimate is unchanged.  We assign a no-moat rating to Arconic.

Rumors of an Arconic takeover have swirled in recent months. Reports have indicated that various suitors have shown interest, while activist hedge fund Elliott Management has pushed for a sale from within. The Wall Street Journal reported earlier this year that Arconic has considered takeover offers from multiple firms with potential deal prices in the "mid-$20s" per share. Thus, it is quite possible that a competing bid could emerge, but we are skeptical that any such bids would come at a significantly higher valuation.

The embattled company likely faces a lengthy turnaround. Profitability for the flagship engineered products and solutions segment has contracted materially year-to-date, and the new management team is conducting a "portfolio review" of all major business lines. Although many have stated that the Trump administration's aluminum tariff program has driven significant margin contraction, we are less concerned on this front. Ultimately, elevated aluminum prices and an elevated U.S. Midwest aluminum premium should be passed on to customers via higher product prices. Thus, although higher prices can make aluminum less attractive relative to other metals, the negative impact on near-term profits should ultimately reverse. Moreover, we forecast sharply lower aluminum prices over the long term.