Nomura On Alcoa: We View The RTI International Metals Acquisition Positively; Reiterate Buy

Shares of Alcoa Inc

are down on Tuesday, after it announced it will acquire RTI International Metals, Inc.

– the stock of RTI is also down. The former will acquire the latter -a producer and global supplier of advanced titanium mill products and a manufacturer of fabricated titanium and specialty metal components- in a transaction valued at $1.5 billion. Despite the fall in the stock prices, Nomura analyst Curt Woodworth reiterated a Buy rating and a $23 price target on shares of Alcoa, as he sees the acquisition positively. "The transaction represents 13.1x LTM EV/EBITDA or 11.1x/10.0x 2015E/2016E consensus EV/EBITDA," a report rolled out Tuesday explains. The purchase will be financed as a stock-for-stock transaction. Alcoa will issue $1.26 billion in equity (approximately 89 million shares) and will assume $517 million in convertibles, plus $330 million of cash on hand. The analyst says that Alcoa "expects the addition of RTI's titanium and fabricated products to increase its existing downstream aerospace revenue by 13% to $5.6bn, bringing aerospace to ~22% of total 2014 pro forma revenue from ~20%." He then adds: "AA expects to grow RTI revenue to $1.2bn from ~$800mm in 2014, driven by 4-5% market growth and $200mm in share gains, which is likely to be driven more by downstream VAP growth. Importantly, 65% of expected 2019 revenue is supported by existing contracts."