Arconic (ARNC)

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The $15bn buyout of Arconic by Apollo Global Management fell apart due to a last-minute dispute over hundreds of millions of dollars needed to cover pension obligations owed to the US manufacturer’s retirees, according to people involved in the transaction.

The unravelling of what would have been one of the largest leveraged buyouts since the financial crisis had little to do with the potential liabilities related to Arconic’s flammable cladding panels linked to the deadly Grenfell Tower fire in the UK — as many industry observers had speculated.

Instead, the sticking point involved issues investors and analysts had paid little attention to: underfunded pensions, as well as a disagreement over the company’s dividend policy in the period between an announcement of a buyout and its completion.

The decision by Arconic’s board to walk away from the deal at the last minute — up until midday on Monday, the company had agreed in principle to sell itself to Apollo and activist hedge fund Elliott Management — stunned investors. The company’s shares fell more than 16 per cent on Tuesday, wiping $1.6bn off its market valuation.

After seven months of difficult negotiations, the Arconic board was exasperated by an eleventh-hour attempt by Apollo to tweak the terms.

The two sides had agreed to a deal that valued the company at $22.20 a share. The transaction included a commitment for Apollo to fund hundreds of millions of dollars worth of pension liabilities, the people said.

But the figure Apollo presented to the board later that day fell short of their verbal agreement. Apollo committed to funding the pension obligations but ended up offering roughly one-third less than the board believed was necessary, several people said.

Underfunded pensions have dogged a number of industrial behemoths such as Arconic, which was formed in the break up of metals producer Alcoa in 2016.

Arconic reported a projected pension deficit of roughly $2.5bn at the end of 2017, according to a filing with US securities regulators. There were fears that the additional leverage from a private equity takeover could provoke action from the US pension watchdog, the Pension Benefit Guaranty Corporation.

Arconic previously struck a deal with the PBGC in 2016, in which it agreed to pump $150m into its retirement plans. The PBGC, which safeguards private sector pension plans, said at the time that Arconic’s debt load “in addition to the financial condition of the two largest [retirement] plans, created the potential for additional risk to the company and its pension plans”.

Arconic and Apollo were also divided over whether Apollo would let the company continue to pay its 6 cent per share quarterly dividend of $29m after the transaction was announced, several people said. A person familiar with Apollo’s thinking said Arconic had known as early as September that the private equity group did not plan to pay the dividend once the deal was agreed.

Arconic board members were so angered by Apollo’s conduct throughout the talks that in retaliation it issued a terse public statement to end the negotiations on Tuesday, without giving the private equity group notice.

It was a move that surprised Apollo, which was founded by billionaire Leon Black. The private equity group had been preparing a final offer that it planned to deliver on Tuesday, after markets reopened following the Martin Luther King Jr holiday, according to one person involved in the talks. The person added that the goal was to resolve outstanding differences that day.

Apollo, Arconic and Elliott declined to comment.

https://www.ft.com/content/4c82b2dc-1ebb-11e9-b2f7-97e4dbd3580d