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Alcoa To Explore Sale Of Packaging Operations

Alcoa, the world's largest aluminum company, said it may sell three of its businesses including its packaging unit, which makes Reynolds Wrap, sending shares of the world's largest aluminum company up more than 7%.

Alcoa's rally, along with several strong corporate earnings reports, played a key part in the Dow Industrials' jump above 13,000 for the first time.

The company said the strategic alternatives review would include sale or possible joint ventures for the packaging, electrical and automotive castings businesses. The units contributed about 16%, or $4.8 billion of the company's revenue in 2006.

The sale of the businesses could reduce Alcoa's work force of 122,000 by more than a third. The packaging, electrical and automotive businesses employ about 10,000, 34,000 and 500 employees, respectively.

The company said it would consider all possible options, including joint ventures and a sale of the business.

"We're going to look at all options available," said Alcoa spokesman Kevin Lowery.

Alcoa expects to complete the process by the end of 2007.

Wall Street has been pushing for a similar move by Alcoa and has long argued that Alcoa's packaging assets are a drag on its operating results.

The packaging unit is expected to attract heavy private equity interest, as these firms seek undervalued units and strong cash flows. Private equity firms buy companies or controlling stakes by borrowing most of the money. They typically cut costs, restructure the business and sell them later.

Private equity firms have flocked to packaging-related deals in the last few years. At least four buyout firms pursued the sale of Berry Plastics last spring, with Apollo Management and Graham Partners agreeing to buy the business for $2.25 billion in June.

"We view this as a major step forward in Alcoa's initiative to restructure underperforming assets." said Credit Suisse analyst David Gagliano in a research note.

"Our sum of the parts analysis suggests equity market value of approximately $1.9 billion - $2.4 billion for the packaging assets," said Gagliano.

According to Alcoa, the packaging business generated about 10%, or $3.2 billion, of the company's revenue and about 3%, or $95 million, of after-tax operating income in 2006.

The packaging businesses that will be included in the review are flexible packaging, consumer products, Reynolds Food Packaging and Closure Systems International, Alcoa said in a statement.

"To me it is another step in their program of trying to improve their investment returns," said analyst Charles Bradford of Bradford Research/Soleil.

Bradford said the packaging and consumer business did not generate a very high return, but there might be buyers that are willing to pay a lot of money for the business, as it seems relatively stable and could take on debt.

Alcoa said the the electrical and automotive castings units had combined 2006 revenues of about $1.6 billion and termed the businesses as "marginally profitable."

"While there can be no assurance that exploration of alternatives will result in any type of transaction, this initiative should unlock the value in these businesses," said Chief Executive Alain Belda.

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