Alcoa (NYSE:AA), the largest aluminum producer in the United States entered a definitive agreement to purchase Firth Rixson Limited, an aerospace-components maker for $2.85 billion in cash and stock to expand its jet engine components business.

Alcoa Inc (AA)
Alcoa Inc (AA)

Firth Rixson manufactures seamless rolled rings for jet engines made from nickel-based super alloys and titanium.

Major milestone in Alcoa’s transformation

In a statement, Klaus Kleinfeld, chairman and CEO of Alcoa Inc (NYSE:AA) said the acquisition is a major milestone in the transformation of the company. According to him, “The transaction brings together some of the greatest innovators in jet engine component technology.”

Kleinfeld added that the deal would significantly expand the growth and leadership potential of the company. He said, “Firth Rixson increases the earnings power and broadens the market reach of our high-value aerospace portfolio.”

Transaction details

According to Alcoa Inc (NYSE:AA), it will pay $2.35 billion in cash, $500 million of its common stock for Firth Rixson Limited and an additional $150 million potential earn-out. Oak Hill Capital Partners LP, a private equity firm based in New York owns the aerospace-components maker.

The aluminum giant said the acquisition provides significant benefits. Alcoa Inc (NYSE:AA) estimated that the revenue Firth Rixson Limited will increase 60% from $1 billion to $1.6 billion over the next three years. It is expected to contribute $250 million EBITDA in 2016.

Alcoa Inc (NYSE:AA) projected that the sales of the aerospace-components maker will grow at annual rate of 12%, which is two time more than the expansion of the global aerospace market through 2019. The aluminum giant said long-term agreements secure approximately 70% of Firth Rixson’s growth.

The board of directors of both companies unanimously approved the transaction, which is still subject to customary closing conditions and regulatory approvals.

Highly-complementary

Alcoa Inc (NYSE:AA) said its businesses were highly-complementary with Firth Rixsons’ with limited product overlap.

The aluminum giant expected to achieve significant synergy cost savings driven by purchasing and productivity improvements as well as optimizing internal metal supply and leveraging its global shared services.

Alcoa Inc (NYSE:AA) estimated that cost saving to be more than $100 million annually on the fifth year of the acquisition. The aluminum giant said the transaction is expected to be neutral to earnings in the first year and accretive thereafter.

In a note to investors, John Sullivan, an analyst at Sterne Agee & Leach commented, “Alcoa’s strong aerospace positioning is underappreciated. We, therefore, view this transaction as both highly accretive as well as helping to raise Alcoa’s aerospace profile.”