The unit generated $3.2B in revenue and $95M in profits in 2006, representing 10% of Alcoa's yearly revenue and 3% of its earnings. The sale includes well-known Reynolds Wrap and Food Packaging. Alcoa expects to complete the sale by the end of March.
Higher raw material costs have hurt profits at the unit, which boasts 10,000 employees. "Alcoa is better off without packaging; this is a low- margin business," Soleil analyst Charles Bradford said in a telephone interview with Bloomberg. "The best returns are in the upstream." In April, Alcoa announced plans to look for alternatives for the businesses; in Q3 it took a $604 million charge related to the sale.
In July, Alcoa failed in a hostile bid for Canadian-based Alcan, which was acquired by Rio Tinto $38.1 billion (Alcoa Concedes Alcan; Traders Think It Could Be Next). Some analysts say Alcoa may be more attractive to suitors as it sheds weak units that aren't directly related to aluminum production. "We would not be surprised to see M&A speculation rekindle around Alcoa," Citigroup analyst John Hill said in a Dec. 19 note. "The diversified miners are cash rich and facing a dearth of reinvestment opportunities."