In the largest foray by a Chinese company into the U.S. aluminum market since the financial crisis, Zhongwang USA LLC said this week that it would buy U.S. aluminum company Aleris in a $2.33 billion deal, expected to close Q1 2017.
Zhongwang USA is owned by Liu Zhongtian through his Chinese group Zhongwang International Group Ltd. but he is also the founder of Asia’s second-biggest extruder, Hong Kong-listed aluminum products maker China Zhongwang, a firm embroiled in anti-dumping cases in the U.S. Liu has been angling to get a toe in the U.S. market for some time, there was talk of a $120 million aluminum casting plant in Barstow, Calif., as part of an earlier attempt to get into the U.S. but it came to nothing in the end.
Zhongwang is making a bet on the growing automotive aluminum sheet market, being a substantial manufacturer of automotive extrusions in China and recently building a rolling mill for automotive sheet to service the Chinese automotive body market.
Aleris is in the midst of a $350 million expansion of its Lewisport, Ky., rolling mill to produce automotive body sheet, saying it hopes to produce 200,000 tons per year of sheet and coil and begin shipping in 2017.
Aleris is an interesting acquisition. Technically sophisticated and capable, it suffered a disastrous early life under private equity owners TPG who loaded it up with debt only for the firm to declare Chapter 11 bankruptcy in 2009 as a result. New owners, led by private equity firms Oaktree Capital and Apollo Global Management, have done a better job investing in new facilities and aiming for an IPO next year.
Management, though, is naturally keen on a trade sale saying it would allow them to focus on long-term investments without worrying about the next quarter’s performance. In a cyclical industry like aluminum, even at the downstream end that Aleris operates in, a longer-term perspective makes more sense than the short termism of the stock market or private equity.
Zhongwang, though, is a controversial buyer. The company’s sister operation, China Zhongwang, is the subject of two aluminum anti-dumping investigations in the U.S., and while China Zhongwang is technically a public listed company on the Hong Kong stock exchange, the firms are all linked through Mr. Liu’s involvement and remaining shareholding.
The cases against Zhongwang allege that the firm has been selling aluminum extrusions at below cost and that the Chinese entity receives state aid in the form of financing and other benefits giving it an unfair advantage. If the deal fails, it seems more likely it will be on the basis of the related Chinese company’s trade dispute than the price or willingness of both parties to do a deal.
Negotiations seem quite far along with a price of $1.11 billion in cash plus $1.22 billion in net debt already agreed and management at both firms positive about a deal. For Zhongwang, the attractions are clear: aluminum for automotive and aerospace applications in the U.S. and Europe where Aleris is well established is on a robust growth path with every indication it will continue well into the next decade as both lightweighting in automotive and strong order books for aircraft ensure solid demand. For Aleris, at least the backing of a patient, long-term trade player — even if they are based on the other side of the world — could be a good move.
Tata’s takeover of Jaguar Land Rover was criticized at the time it was announced but JLR has flourished under Tata’s ownership enjoying robust growth and massive investment. One can only hope the same for Aleris.