RIVERDALE, Iowa — On Thursday, May 4th, 2023 Aluminum maker Arconic accounced it is being taken private by Apollo Global Management in a deal worth approximately $5.2 billion.
Arconic's plant in Riverdale employs 2,400 people in the Quad Cities, according to the Quad Cities Chamber list of major employers. News 8's David Bohlman spoke with Mark Grywacheski from Quad Cities Financial Group to learn more about Apollo Global Management and what ripple effects we may see because of it.
David: What can you tell us about Apollo Asset Management? Who are they and what exactly do they do?
Mark: Apollo Asset Management is one of those very large private-equity firms that has a long history of acquiring- in what it views, as either distressed or underperforming companies- and provides a strategic vision and infusion of capital to create a stronger, more profitable company. Over the past few years, Apollo has made a number of high-profile acquisitions: (Refer to graph).
Apollo must believe that under its strategic control- and along with a massive infusion of cash- that it can take Arconic to that next level of success. As part of its acquisition, Apollo has announced it is willing to make substantial investments of capital to shore-up Arconic’s production technology and capabilities but also that it will acquire Arconic’s $1.6B of outstanding debt.
David: Do you think this sale of Arconic is indicative of the broader manufacturing sector and do you think we’ll see similar acquisitions of other manufacturers?
Mark: It’s hard to predict because each manufacturer has its own strengths, weaknesses and nuances. But I think this acquisition by Apollo was a bit of a surprise even though Apollo has been trying to work some type of deal for Arconic since early this year.
For the past six months, the US manufacturing sector has actually been in contraction and has been one of the weaker components of the US economy. In my opinion, that weakness will continue for most/if not all of 2023. There’s also significant concerns of a recession later this year which further clouds the outlook for the manufacturing sector.
But also, we’re beginning to see a rapid decline in these types of corporate acquisitions. One way companies buy-out another company is by taking on debt to finance the purchase. Over the past 12 months, however, interest rates have soared. This makes it much more expensive for one company to borrow money to purchase another company.
David: Arconic owed about $1.6 billion in debt to its creditors. To what extent did this sizable amount of debt factor into Arconic deciding to sell to Apollo?
Mark: Arconic had taken on a lot of debt over the past 3 years. Even though they did carry about $1.6B in debt, from what I’ve heard, I would consider it a “sizable” amount of debt but not “crippling”.
But the challenge with carrying even a sizable amount of debt is that it can severely impact your cash flow. Arconic had to allocate a lot of its cash just to satisfy the principle and interest payments on that $1.6B it owes its creditors. And that’s a lot of cash that can’t be used to reinvest in its workforce or buy new machinery, equipment or technology.
But even if this $1.6B in debt was deemed “manageable”, there’s tremendous economic uncertainty over the next 12-16 months. If the US economy does go into recession- or worse, if there is a global recession that stretches into 2024- that would likely further restrict Arconic’s ability to generate revenues and a steady supply of cash.
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