Elliott Letter to Arconic Board
Feb 13, 2017
Dear Independent Directors of Arconic Inc.:
Two weeks ago, Elliott announced its nomination of five new directors and we suggested the Board consider Larry Lawson as Chief Executive Officer.
• Arconic’s equity value has increased by more than 35%.1
• The increase has been supported by substantial trading volume in Arconic’s shares – more than 17% of the company’s shares have changed hands since our nomination, and the average daily share value traded has more than doubled.
• Far more value – approximately $3 billion – has been created for Arconic’s shareholders simply as a result of the evident prospect of long-awaited management change than the current leadership has been able to generate over nearly a decade.
• Four of Arconic’s top fifteen shareholders, including Elliott, have now come out publicly in support of management change.
• Multiple sell-side analysts have published notes validating the opportunity for significant operational improvement and illustrating substantial upside to Arconic’s shares, consistent with Elliott’s own analysis, in the event a change in management is effectuated. (See Appendix)
• Our own conversations with a broad spectrum of investors reveal a widespread and overwhelming desire for new leadership.
Last week, in its letter to shareholders, the Board stated, “this is a critically important, formative time for Arconic,” and insisted, “we cannot afford to be distracted.”
We agree. A stubborn defense of the status quo when the owners for whom the Board serves as fiduciaries clearly prefer change is inappropriate and counterproductive. It results in precisely the type of “distraction” which the Board has said it wishes to avoid.
If the Board meant what it said, then it will do the right thing and begin a constructive dialogue to put in place new leadership. The time is now.
Senior Portfolio Manager
Appendix: Analyst Reports:
We see as much as 20% downside if Kleinfeld continues as CEO. – Gordon Haskett, February 13, 2017
Our analysts currently have a price target for ARNC of $36 per share, but that number could be conservative if Elliot is able to make the proposed changes to the board and bring in Larry Lawson as the new CEO, who has an incredible track record of maximizing shareholder value at his previous posts. Despite ARNC running up over 30% since our recommendation, we still strongly recommend purchasing the stock at current levels. – The Spin-Off Report, February 3, 2017
In line with our analysts, Elliot makes the contention that Arconic’s EPS segment dramatically lags its peers, specifically, Precision Cast Parts (NYSE: PCP), which is a nearly identical business in terms of product mix and end markets. - The Spin-Off Report, February 3, 2017
We are increasing our medium term earnings forecasts and our price target to $33 for Arconic, as we now incorporate more substantive cost reductions… Our segment analysis and peer benchmarking suggest more material cost down potential at ARNC and improvements to asset turns as the market recovers. Our analysis skews towards the "low case" of improvement outlined by Elliott in their Jan 31st presentation (newarconic.com) and we see the potential for more radical change both from at a broader portfolio level and with respect to corporate overhead if the shareholder base aligns with Elliott's views. – Credit Suisse, February 9, 2017
EPS and PCC Comparison is Warranted: While ARNC has a relatively small large structural castings business at La Porte (~$300mm), the EPS segment is a global leader in medium sized castings and fasteners. Our analysis suggests EPS should be able to close the gap with PCC to within 100-150bp. – Credit Suisse, February 9, 2017
We believe there is substantial room for margin improvement across all aspects of the business and especially in the EPS segment. – Credit Suisse, February 9, 2017
We also acknowledge activism could create an opportunity to highlight value that is even higher at $40 (and in the range of the activist target) to account for significant margin expansion from current levels. – Morgan Stanley, February 1, 2017
We are of the view that there is considerable margin / revenue expansion opportunity at the company as highlighted by our updated bull case ($40 per share). – Morgan Stanley, February 1, 2017
In our view, a new CEO is an important positive catalyst to more expeditiously improve the company’s operations and increase its margins while rationalizing capital expenditures / M&A opportunities. – Wolfe Research, February 6, 2017
If the company’s largest shareholder is not successful in effecting change, the company’s management may remain entrenched and not realize the margin expansion opportunities as soon as we expect. – Wolfe Research, February 6, 2017
Apart from industry fundamentals improvement, the special situation thesis for Arconic is chiefly a ‘selfhelp’ story of new leadership more expeditiously improving the cost structure in addition to improving capital allocation… Our analysis suggest fair value for Arconic of ~ $43 if the improvements occurred holding the current fundamentals of the company constant. – Wolfe Research, February 6, 2017
For the EPS segment, Arconic’s margins are on a long term average ~650 basis points lower Precision Castparts and we assume margins improve to that of Precision Castparts. – Wolfe Research, February 6, 2017