Aleris continues shopping spree, buys aluminum assets from Corus Group; posts improved results

By Paul Deckelman

New York, March 16 - Aleris International Inc. said Thursday that it has agreed to acquire the downstream aluminum business of European metals manufacturer Corus Group plc for about $840 million, plus the assumption of €28 million of debt, as well as certain other liabilities.

The move, covered by a non-binding letter of intend, is the latest in a series of acquisitions the Beachwood, Ohio-based aluminum and zinc producer has undertaken over the past year.

Aleris separately announced improved 2005 fourth-quarter and full-year financial results, and indicated that despite a rise in its total debt load and its net debt due to the cost of financing the acquisitions last year, its leverage ratios had also improved on a pro-forma basis because of the additional earnings that the newly acquired properties would produce.

Aleris and Corus will enter into a binding agreement following Corus' consultations with the appropriate European employee works councils and trade unions as required by labor laws there. Subject to regulatory approvals, closing should take place in the third quarter.

Aleris expects to fund the acquisition with a combination of debt and equity, and has received a joint commitment from Deutsche Bank AG and Citigroup Corporate and Investment Banking to provide any funding necessary to close the transaction. Citigroup acted as its adviser for the purchase transaction.

The proposed transaction would include Corus' aluminum rolling facilities in Koblenz, Germany, Duffel, Belgium and Cap-de-la-Madeleine and Toronto, Canada and its extrusion facilities in Vogt, Bonn and Bitterfeld, Germany, in Duffel, and in Tianjin, China. However, it will not include Corus' primary aluminum smelters in Delfzijl, Netherlands and Voerde, Germany. The downstream plants being acquired employ about 4,600 people.

Aleris would add those plants to its existing 42 production facilities in the United States, Brazil, Germany, Mexico and Wales, which employ about 4,200 people.

Aleris will execute a metal supply agreement with Corus for a portion of the expected aluminum requirements of the rolling and extrusion businesses.

Besides acquiring a geographically broader range of customers with the acquisition, Aleris will also be moving into new aluminum production areas it has not been in previously, including aircraft plate and sheet, automotive sheet and hard-alloy extrusions, among others. The Koblenz rolling mill it is acquiring, in particular, is considered one of the most specialized mill facilities in the world, with longstanding relationships with leading aerospace, commercial plate and brazing sheet customers worldwide, Aleris said in a statement announcing the transaction.

Series of mergers since December 2004

The purchase of the Corus aluminum rolling mills and extrusion assets are the latest in a series of aggressive moves to expand in size that Aleris has made since its formation in December 2004 when aluminum recycler IMCO Recycling Inc. acquired aluminum sheet maker Commonwealth Industries, Inc.

Transactions last year included the acquisition of Alsco Holdings, Inc., a manufacturer and fabricator of aluminum sheet products for the building and construction industry, which closed on Oct. 3, the acquisition of Alumitech, Inc., an aluminum recycler and salt cake processor, which closed on Dec. 12, and the acquisition of selected assets of the Ormet Corp., including rolling mill assets, a recycling operation and an aluminum blanking operation, which closed on Dec. 20.

Earlier in the year, Aleris had purchased Tomra Latasa Reciclagem, a Brazilian aluminum recycler supplying Brazil's largest can sheet manufacturer, a transaction which closed on Aug. 23.

The businesses being acquired from Corus generate about $1.8 billion revenue annually. Aleris expects the proposed transaction to be accretive to earnings in the first 12 months following the acquisition, with as much as $25 million of synergies potentially realizable over the next two years.

2005 results

Aleris on Thursday separately announced its financial results for the 2005 fourth quarter ended on Dec. 31 and for the full year. For the quarter, the company reported a net loss of $5.2 million (17 cents per share) on revenues of $625.5 million. The results included a loss of $1 per share per share from special items, including $25 million related primarily to the closure of its Carson, Calif. rolling mill scheduled for the end of the current first quarter. In the year-ago quarter, Aleris lost $26.5 million ($1.42 per share) on revenues of $372.6 million, including $10.7 million of restructuring and severance costs from the Commonwealth merger.

For 2005, Aleris reported net income of $74.3 million ($2.38 per share) on revenues of $2.43 billion. The results include a pre-tax loss of $1.94 per share from special items including $29.9 million of restructuring and asset impairment charges related primarily to the closing of the Carson mill shutdown. In 2004, it posted a net loss of $23.8 million ($1.51 per share), on revenues of $1.23 billion. The 2004 results included $15.2 million of restructuring and severance costs related primarily to the Commonwealth merger.

Long-term debt as of Dec. 31 was $631.024 million, not including another $20.813 million of current maturities of long-term debt, versus year-end 2004 long-term debt of $412.338 million, not including $65,000 of current maturities.

Cash flow of $102 million

Aleris said in its 10-K annual report to the Securities and Exchange Commission that it generated operating cash flows of $102.3 million in 2005, allowing it to pay down $50.8 million of debt under its revolving credit agreement, fund its U.S. capital spending requirements of $31.6 million, acquire Tomra Latasa and partially pay for the acquisition of Alsco.

As of Dec. 31, its revolver borrowings were $263.325 million, of which $257 million was used to pay the rest of the acquisition costs of Alsco and to fully fund the purchases of Alumitech and the Ormet assets.

In conjunction with the purchase of those Ormet assets, Aleris amended and restated its senior credit facility to increase the borrowing capacity to $425 million from $325 million, reduce the margin spread for borrowings under the federal funds rate and to extend the term of the facility to December 2009. As of the end of 2005, the weighted average interest rate under the facility was 6.33%.

Under the terms of the agreement, Aleris's access to the credit facility is subject to a borrowing base calculated from eligible domestic inventory and receivables. As of Dec. 31, the total borrowing base was about $369.593 million. After giving effect to the outstanding revolver borrowings and to $16.705 million of outstanding letters of credit, the company calculated that its year-end availability under its revolving credit facility totaled $89.563 million.

The company's capital structure includes $207.853 million of 10 3/8% senior secured notes due 2010. Aleris had bought back $1.17 million of the bonds in March 2005 via a tender offer. The bonds currently trade at a premium to par, in the 110-111 range. The company also has $125 million of 9% senior notes due 2014 out.

Interest expense increased in 2005 versus 2004, primarily due to higher levels of debt resulting from the Commonwealth acquisition, which occurred at the end of 2004, and the 2005 acquisitions of Alsco, the Ormet assets, Alumitech and Tomra Latasa. During 2005, Aleris' average debt outstanding increased from $267.8 million in 2004 to $421.1 million in 2005.

The company's cash position as of Dec. 31 stood at $6.822 million, not counting another $6.183 million of restricted cash. That was a smaller cash position than the year-earlier $17.828 million, not including another $16.007 million of restricted cash.

Aleris expressed confidence that its cash on hand and anticipated internally generated funds will be sufficient to fund its current level of operational needs for at least the next 12 months.

Leverage improves

Although net debt was up about $250 million year-over-year and increased by $336 million during the quarter from the quarter before due primarily to acquisitions, inventory buildups to accommodate acquisition integration and the impact of the rising London Metal Exchange prices of aluminum and zinc on working capital, the company said, the acquisitions it made during the year actually helped to bring down its leverage ratios, by boosting EBITDA. On a pro-forma basis including the acquisitions, the ratio of net debt to EBITDA on a last-12-month basis, excluding special items, was 2.3 times as of Dec. 31, versus a 3.0 times ratio of net debt to last-12-month EBITDA at year-end 2004.

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