Arconic (NYSE:ARNC) CEO Chip Blankenship is out after barely a year on the job, further unsettling a company that has had a chaotic run since being spun off by Alcoa (NYSE:AA) in 2016.
Blankenship’s restructuring plan was central to the Arconic bull case, and his sudden departure hints at a broader boardroom battle behind the scenes. Investors should tread carefully as the latest chapter in the Arconic saga plays out.
The fourth CEO since 2016
Arconic said before markets opened on Wednesday that Blankenship, who took over as CEO in January 2018, had been replaced by chairman John Plant, the former CEO of TRW Automotive. Plant will serve as CEO for one year, with fellow director Elmer Doty also joining the company as chief operating officer.
The departure comes barely two weeks after Arconic walked away from talks to sell itself to Apollo Global Management in favor of remaining independent. I believe that decision was a long-term win for investors who now have the opportunity to reap the benefits of a turnaround instead of Apollo. But activist fund Elliott Management, holder of 10.75% of the company as of Sept. 30, was said to strongly favor the transaction.
Image source: Arconic.
Elliott feuded with Blankenship’s predecessor, Klaus Kleinfeld, who stepped down in April 2017 after the board said he showed poor judgement in his interactions with Elliott. Between April and January, the company was run by interim CEO David Hess, meaning Plant is the fourth CEO in Arconic’s brief history.
Arconic’s statement announcing the CEO change offered few details, but news reports paint an unsettling picture. Blankenship was said to be in favor of the buyout, which would give him more freedom and flexibility to orchestrate his plan without the constant spotlight — and quarterly reporting requirements — of a public company.
Arconic’s board, however, was against the deal, and tensions between Elliott Management and Plant, who was originally appointed to the board at Elliott’s request, are said to be running high. The New York Post reported Tuesday that investment bankers pushing the deal gave out Plant’s personal information, including his mobile number, to key shareholders after the deal was rejected in hopes the investors would pressure the board chairman to reconsider his decision.
Internal struggle, external challenges
If the Post is correct, Arconic is in a difficult position. When Blankenship first arrived, he described a company in disarray, implying that Kleinfeld, while still with Alcoa, had done a poor job integrating the numerous acquisitions that were combined to create Arconic.
“While the company has many strengths, there are clearly areas that need improvement,” Blankenship told investors in February 2018 shortly after taking the job. “In the end, it comes down to execution, and I am working with our team to improve here.”
He made solid progress in the quarters since, picking low-hanging fruit like moving the company’s headquarters out of high-cost New York City and seeking buyers for its building and construction-systems business and other slower-growing businesses, in order to focus on aerospace and other better-performing sectors.
The company reported third-quarter earnings that beat expectations, raised full-year earnings guidance, and reaffirmed that guidance when announcing Blankenship’s departure.
What investors should do now
Investors will learn more about what comes next on Friday, Feb. 8, when Arconic announces its full-year 2018 results and provides an update on its portfolio review. I’d expect the restructuring plan to remain largely intact, as Plant presumably thought enough of Blankenship’s strategy to reject Apollo’s $22.20 per share offer.
The good news for investors is that if you can look past the drama, Arconic still has an impressive set of assets and exposure to long-term growth markets including aerospace. And, according to its now-former CEO, it also has a pretty straightforward path to streamline operations and improve results.
ARNC two-year price data by YCharts
Apollo was interested in Arconic because the company’s shares are cheap. The offer price of $22.20 per share was below where Arconic had traded for much of its time as an independent company, and the proposed deal, priced at about 12 times forward EBITDA estimates, was far less than the 17.5 forward EBITDA multiple Berkshire Hathaway paid in 2016 for Arconic competitor (and better performer) Precision Castparts.
Still, the prospect of owning a company where management and a key shareholder are on separate pages is disconcerting. Arconic still has issues to resolve, including a substantial debt burden and liabilities due to London’s Grenfell Tower fire in 2017. There is also the risk of a global slowdown that would eat into demand.
Blankenship’s departure and the intrigue surrounding the move are a blow to the case for buying Arconic. However, there is still plenty to suggest that a solid management team can cut significant inefficiencies and over time increase the company’s valuation considerably.
For those who can stomach a restructuring and a potential boardroom battle, Arconic remains an interesting, but speculative, buy.