The announcement this week that Norwegian aluminum firm Norsk Hydro had agreed to buy the 50% of extrusion company Sapa that it did not already own from its partner Orkla probably makes good sense for all parties concerned.
Norsk Hydro and Orkla took on Sapa in 2013 as a joint venture, but the Norwegian consumer goods company Orkla was never an obvious fit to be owning aluminum extrusion mills. Meanwhile, Norsk Hydro, with its significant position at the primary end of the market, makes a natural buyer for downstream assets, particularly if it carries the strong brand name of an established producer like Sapa.
The $24 million deal is said by the Financial Times to value Sapa at $3.2 billion. Assuming the deal passes regulatory approval, it will make Hydro the second-largest Norwegian company, trailing only the energy group Statoil.
The markets seem to agree with the logic of the deal. Orkla’s shares rose 2.44% on the news while Hydro’s rose a more modest 0.74%. But while Hydro said it planned to make $24 million of synergies a year from the deal, analysts said it really only made sense if the Norwegian group could achieve more cost savings over time.
While Hydro is a very significant primary and flat-rolled products producer, it is only through its shareholding in Sapa that it has held any significant position in extrusions. The purchase will allow Hydro to justifiably call itself a vertically integrated aluminum producer with a broad product range rivaling the likes of Alcoa and Rusal.
No doubt a question in the minds of many Sapa employees and of their clients is whether the purchase will result in a cutback of Sapa’s global operations.
On the back of an upturn in aluminum prices, both Norsk Hydro and Sapa have been doing well lately. However, the aluminum industry faces headwinds from excess Chinese production and price pressure from resulting Chinese exports. One benefit of the purchase mentioned by the Financial Times was that of European consolidation in the face of excess Chinese supply.
With no comment from the company yet, both employees and customers may justifiably be wondering what that means for them.